Why do so many (large) companies choose to incorporate in Delaware?

Why do so many (large) companies choose to incorporate in Delaware?

Many are surprised to learn that the chief reasons are unrelated to taxation. In fact, they are…

1. The Statute. The Delaware General Corporation Law is regarded as relatively flexible, which allows great ability to structure the relationship between a corporation’s shareholders (i.e., owners), directors (i.e., managers) and officers (i.e., executive agents).

2. The Case Law. Given the age of Delaware’s corporate law and the large number of Delaware corporations, there are many reported cases law interpreting corporation law and resolving difficult questions.

3. The Courts. The Delaware courts are regarded as being comprised of judges who are very knowledgeable in matters of corporate law.

4. The Legislature. Delaware’s legislature is responsive to the corporate legal community and recognizes the need to keep the State’s corporation law current and effective.

5. The Commercial Recording Office. The recording office, which processes a variety of state corporate filings, is regarded as having a knowledgeable and helpful staff.

For similar reasons, Delaware is a popular place for forming limited liability companies and limited partnerships, too.

Should I incorporate or form my (small) business in Delaware?

Well, in most cases, the state in which your company will be physically located and will conduct most of its business will be the best choice. When you think about it, are the above reasons really that important to a small or startup company? Probably not.

Are there disadvantages to forming or incorporating in a state other than where my company will be located and will conduct its business? 

Yes. Consider the following…

1. Registration as a Foreign Company. If a company that is formed/incorporated in one state conducts significant and pervasive business in a second state, the second state can require it to “register” (a.k.a., “qualify” or “obtain authority”) to do business in the second state. This will often require additional filings and fees, as well as designating a registered agent in the second state.

2. Expertise. You many need legal and tax counsel familiar with the laws and customs of more than one state.

3. Securities Registration. Issuing ownership interests (e.g., stock, membership interests, partnership interests) to a resident of a state other than the state in which your company is domiciled (i.e., “lives”) is more likely to require the registration of the ownership interests with state or federal securities agencies.

For these and other reasons, the added burdens of forming or incorporating in a “distant” state may far outweigh the benefit, if any, gained.

Wait a minute! My “small” company is going to be the next Apple. Shouldn’t I incorporate in Delaware now?

Well, as an aside, Apple is a California corporation. But, that’s a fair question. In the vast majority of cases, the initial state of incorporation will not present a barrier to attracting venture capital or “going public” because there will be ample opportunity to change the company’s state of incorporation should the need arise.

Concluding thoughts… The determination of where to form or incorporate a company raises important legal and tax issues and, therefore, it is in the best interest of the entrepreneur to seek the advice of competent counsel when choosing the state of formation/incorporation.

March 27, 2017

DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.