Startups Stack Exchange Archive

Why incorporate in Delaware?

• posted by: connor on 2014-09-02
• tagged: united-states, tech-company, business-registration, delaware
• score: 7

I’ve heard most tech startups officially incorporate in Delaware. I know facebook incorporated in Delaware, but operated out of California in its early days.

Why has Delaware become a standard state to incorporate in? What are the advantages to incorporating in Delaware versus the state your startup is based in? Do these advantages apply to all startups, or only ones like facebook that are looking for huge growth and investment?

Answer 586

• posted by: jdero on 2014-09-02
• score: 7

Well, it seems the answer is pretty obvious, and is exactly what my lawyer told me when we chose to incorporate our s-corp in Delaware: tax and business advantages.

I'm personally not a lawyer, but hey, it's SE, and I'm all about references. Learn from bizfilings.com here:

• Delaware’s business law is one of the most flexible in the country.
• The Delaware Court of Chancery focuses solely on business law and uses judges instead of juries.
• For corporations, there is no state corporate income tax for companies that are formed in Delaware but do not transact business there (but there is a franchise tax).
• Taxation requirements are often favorable to companies with complex capitalization structures and/or a large number of authorized shares of stock. There is no personal income tax for non-residents.
• Shareholders, directors and officers of a corporation or members or managers of an LLC don’t need to be Delaware residents.
• Stock shares owned by persons outside Delaware are not subject to Delaware taxes.

Furthermore, regarding your words about large corporations like Facebook (looking for huge growth or investment) --

" the court system is not a primary factor when choosing where to form a business, but Delaware deserves a special mention. The Delaware Court of Chancery is often considered an advantageous venue for shareholder lawsuits. It hears only business cases and uses only judges, no juries. For large corporations with thousands or hundreds of thousands of shareholders, this can be a big plus."

So, in more or less words, key differentials are absence of state corporate income tax and absence of personal income tax for non-residents, and finally that no investor is required to be a state resident. Those are the biggest advantages that stuck out when it was explained to me. Best of luck!

---

All content is licensed under CC BY-SA 3.0.