One of the first issues faced by founders of a startup business is where to incorporate or organize their new business. This decision usually boils down to choosing between Delaware and the state in which the founders will be conducting the business, (although Nevada is becoming a popular choice for new businesses also). But more important than knowing the trends in the startup world is understanding why those trends developed. With that information, founders can choose the option that is best for their new startup, not the option that is simply the latest fad.
It may seem odd that so many businesses form in Delaware, but there are a number of reasons why Delaware has become a haven for businesses. First, Delaware has a both well-established and flexible body of business law. Delaware even has courts dedicated exclusively to settling business disputes, the Court of Chancery, whose judges have extensive experience with business law. Venture capitalists in particular like Delaware for this reason – the breadth of coverage of Delaware law and the depth of knowledge of those administering the law reduce uncertainty while at the same time providing opportunities to structure a company in favor of investors. Second, the process for filing documents in Delaware, both initially and in later stages, is well established and very familiar to the business and legal communities. As a result, some initial costs (like lawyers’ fees) are often lower for Delaware. Moreover, Delaware’s filing fees are often less than other states, sometimes significantly. Delaware also provides several levels of expedited filing service (for higher fees), meaning documents can be filed cheaply or quickly depending on the company’s needs. In short, Delaware offers reduced uncertainty, flexibility, and low-cost startup and maintenance for new companies.
Despite the certainty and familiarity of Delaware law and the relatively low initial costs for forming a company in Delaware, it might not be the right choice for all new companies. Startups should consider forming in the state they will be doing business instead. For one thing, forming a company in Delaware but operating it in another state creates more fees and paperwork that add up over time. Companies formed in Delaware have to maintain a registered agent in Delaware, have to file annual reports in Delaware, and have to pay annual franchise taxes in Delaware. These companies would also have to obtain foreign qualification in Delaware and possibly their home state as well. And all of these obligations are additional to any fees, taxes, and annual reports required by the state the company is doing business in. For a new company, these administrative costs can add up quickly.
In short, the decision of where to start a startup is an important one, and the right choice depends on the company. Delaware provides relatively low initial costs and access to a familiar body of business law, both of which can be attractive to a new company. But given the increased costs and complexity of forming in Delaware while doing business in another state, a new company should consider forming in its home state as well.