Why Do Companies Incorporate in Delaware?

If you are one of those who wonders, "Why do companies incorporate in Delaware," then here are some possible explanations for this trend.

  • Low and competitive corporate taxes

  • Friendly political scene

  • Up-to-date and corporation-friendly business environment

  • Ideal legal culture, lawyers, and judges who quickly and expertly address and solve corporate cases

  • Simple filing process for small businesses and protection from penalties

Many Fortune 500 companies choose to incorporate their businesses in Delaware because, despite its small size, the state offers an ideal business environment for startups and big corporations. In addition, Delaware computes taxes out of the revenues of a company, which reduces corporate income tax. Most importantly, the state's Corporation Law is arguably the most adaptable in the country.

Special Considerations for Corporations Under Delaware Law

What makes this state's laws special and why do companies incorporate in Delaware? Big businesses prefer to set up in Delaware because corporate laws in this state are different from others in that they are more specific and are so special that lawyers study Delaware corporate laws, cases, and decisions distinctively. For this reason, you'll find a lot of them who are fully knowledgeable about Delaware business laws.

Moreover, the Court of Chancery in this state ensures that laws are predictable, decent, and appealing to all types of businesses. Since many companies establish their businesses in Delaware, a vast collection of cases and decisions about all kinds of corporate disputes exists.

Corporate laws in this state are highly dynamic. Lawmakers constantly revise them to favor corporations and are minimize the severity of regulations affecting businesses.

Here are other concrete reasons why you can find more than half of the Fortune 500 companies established Delaware.

  • Affordable cost of incorporation

  • You can attract more venture capitalists if you're a Delaware corporation because they don't need to live in the state in order to invest.

  • You don't have to live in Delaware to become a shareholder or an executive of a corporation.

  • You can form a corporation without divulging the names of the board of directors or stakeholders.

  • You don't have to be a resident to incorporate in Delaware.

  • An LLC Registered Agent for a Delaware corporation need not be a resident.

  • One person who is director, officer, and shareholder can incorporate a business in Delaware.

Favorable Corporate Taxes in Delaware

Another reason why many businesses choose Delaware is because of the corporate taxes. Expect the following if you registered a corporation in the state:

  • No corporate taxes for Delaware companies that do business outside the state

  • No income tax for nonresidents

  • Nonresident stock owners of Delaware companies are exempt from Delaware taxes

  • Royalties are not taxable

Businesses and Persons Who Prefer to Incorporate in Delaware

You can find many different business entities that would rather set up shop in Delaware than elsewhere. Here are examples of these individuals:

  • Venture capitalists are firms that are willing to invest in startups in exchange for shares of preferred stocks. They prefer to incorporate in Delaware because the corporate law allows venture capitalists to make corporate decisions without the approval of common shareholders and transactions are a lot easier to implement.

  • Angel investors or affluent business people who inject capital in to businesses like Delaware mostly for the tax laws.

  • Investment bankers are somewhat similar to venture capitalists, but in a more conservative sense. They favor well-established corporations and also prefer Delaware companies for the same reasons as the VCs.

Benefits of Incorporating in Delaware

Aside from excellent corporate laws and business environment, some of the benefits of incorporating in Delaware are:

  • Easy to attract investors and marketability

  • Outstanding privacy protections for directors and officers of corporations

  • Expedited and simplified filing processes

  • Lower business processing fees

  • Low cost of set-up and relocation

  • Low annual franchise taxes

Disadvantages in Registering Your Corporation in Delaware

Incorporating in Delaware also has some disadvantages like:

  • Extra cost of registered agent

  • Extra cost of annual franchise tax in Delaware, if you are operating from a different state

  • Need to adhere to reporting requirements set by the state where you are operating as well as requirements set by Delaware

A good way to avoid some of the extra costs is to register your corporation at the onset in Delaware. Then, you won't have to relocate and pay extra fees if your company has to go public or if a venture capitalist requires you to register in Delaware.

If you need help incorporating in Delaware, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.