Why are so many companies incorporated in Delaware? This article gives the top 10 reasons why more than half a million businesses, including more than half of all U.S. publicly-traded companies and 68% of Fortune 500 companies, have incorporated in Delaware. It then outlines the biggest drawbacks to incorporating in Delaware and explains why it is not a one-size-fits-all solution.
What Are The Benefits to Incorporating in Delaware?
1. Corporate Law Expertise
Delaware has a highly respected court that focuses on corporate issues – the Court of Chancery. Because of this specialization, the Court of Chancery has a great deal of expertise and familiarity in resolving complex corporate disputes.
In addition, cases in Delaware tend to be resolved faster than in other states.
No corporation wants to be involved in litigation, but it is reassuring to know potential disputes will be more quickly resolved by a very knowledgeable judge with extensive expertise in corporate law.
2. Extensive Legal Precedent
Corporate case law in Delaware is much more extensive than in other states due to the high volume of corporate cases.
More case law means increased predictability of the likely judicial resolution of a business law dispute.
If there have been several similar cases to the one facing your corporation there is less uncertainty about the legal outcome, which can be key when strategically deciding whether to settle a dispute or invest the time and capital to litigate.
3. Delaware Corporate Statutes Are Flexible
The Delaware General Corporation Law (“DGCL”) provides a great deal of flexibility in the organization of a corporation and the rights and duties of board members and shareholders.
For example, Delaware allows one person to be the only director, shareholder and officer of a Delaware corporation, whereas some other states require at least three people to fill those positions.
The DGCL is also frequently updated to take into account new court and business developments.
Although many Delaware statutes have been mimicked in other states, the extensive case law mentioned above is an enormous asset when determining how a Delaware statute is likely to be interpreted.
4. Attorney Familiarity
Most corporate attorneys are familiar with Delaware business law. This means your attorney can likely provide more efficient and cost effective assistance if your company is incorporated in Delaware as opposed to a less popular state.
5. Investors Prefer Delaware Corporations
Angel investors and venture capitalists usually prefer to invest in companies incorporated as a C Corp in Delaware. If you are serious about receiving investments from these types of investors, you may want to incorporate in Delaware.
6. Investment Bankers Prefer Delaware Corporations
Many investment bankers insist on a company being incorporated in Delaware before they take it public. If your goal is eventually having an initial public offering (IPO), you may want to incorporate in Delaware rather than converting to a Delaware corporation later.
7. Sending a Message to Investors
If you incorporate in Delaware, you send a message – “This is a national company.” From a marketing perspective, this could be important for your customers and investors. You also send a signal to investors that you understand their preferences and are serious about receiving investments.
8. Greater Privacy Protections
Delaware does not require officer or director names to be disclosed on formation documents. This provides a layer of anonymity that is not available in some states.
9. Quality Customer Service and Quick Turn Around Times
The Delaware Secretary of State’s Office has made it a priority to provide expedited filings. In fact, you can have your filings guaranteed to be processed in less than an hour.
In contrast, California has a 24 hour processing option, but it is not guaranteed to be completed within 24 hours and the rush processing fee is significantly more expensive than in Delaware. This can be critical if you need to close a deal very quickly.
10. Less Expensive To Relocate The Corporation
The annual franchise tax in Delaware can vary depending on a variety of factors, but it can be as low as $125 per year with reporting fees. In contrast, California’s annual franchise tax is $800.
If you incorporate in California and later move the corporation to another state, you still have to pay the $800 annual franchise tax. If you incorporate in Delaware and later move, the annual franchise of your “home state” (where you initially incorporated) could be as low as $125.
What Are The Drawbacks to Incorporating in Delaware?
1. Annual Costs For A Registered Agent for Service of Process
If you incorporate in Delaware, you will be required to have a registered agent for service of process. The annual fees for this service vary, but companies such as Biz Filings and Legal Zoom charge $129 to $149 each year.
2. Extra Franchise Taxes
If you incorporate in Delaware you will not only have to pay the annual franchise tax in the states in which you are “doing business,” but also in Delaware.
For example, if your company is headquartered in California, but you incorporated in Delaware, each year you will not only have to pay the $800 annual franchise tax in California, but also the annual franchise tax in Delaware.
3. Extra Reporting Requirements.
If you incorporate in Delaware, you will have a second layer of reporting requirements. For example, if you incorporate your company in Delaware, but are headquartered in California, you would have to comply with the reporting requirements in both states.
If the benefits of incorporating in Delaware described above are not important to your company, you may want to avoid the extra expense and time of being incorporated in Delaware.
If you incorporated your company in Delaware, what have you found are some of the biggest advantages and disadvantages?