There are two principal reasons why most tech startups incorporate in Delaware:
(1) They are Incorporating as a C-Corp, and (2) They expect high growth.
Before taking any steps towards incorporation, it’s in your best interest to get legal guidance. As others have correctly commented, many people incorrectly assume that Delaware is the best state in which to incorporate when that’s often not the case. It could be depending on the nature of your company, but it often isn’t the best option.
In fact, as you can see from the map below, about one-half of all states (those in red) have adopted the Model Business Corporation Act (MPCA), making corporate law governing both public and private pretty uniform throughout the county. While Delaware remains a notable exception, the trend is leaning towards more states adopting the Act, leaving little variation between most states.
As a general rule, if you are a tech company that’s expecting rapid growth, Delaware may be the best choice. In addition to their state law being highly developed and favorable toward corporations, there tends to be a fairly universal knowledge of Delaware corporate law among lawyers across the country. At the same time, this is often because state corporate law – particularly the further west you go – is often patterned after Delaware corporate law.
Delaware does offer C-corps the greatest flexibility in terms of structuring boards of directors, stock issuance and preference, and voting rights. It also provides the broadest privacy protections. For instance, it doesn’t require director or officer names to be revealed on formation documents.
For these reasons, many investors prefer companies that have been incorporated in Delaware as C-Corps.
On the other hand, you’ll be required to file periodic reports in Delaware, in addition to the state where you do business. Moreover, Delaware requires that you regularly submit franchise taxes, even if you’re paying those taxes to the state/s in which you are already doing business.
Tax planning is definitely one of the more critical considerations when incorporating. The map below will give you an idea of how the different states compare when it comes to paying corporate income tax.
Some observers have noted that another advantage to filing in Delaware is that it takes very little time to complete the incorporation. However, many (if not most) other states enable you to incorporate online with the State Secretary of State’s Office in just a few minutes – and often for a lower fee than Delaware.
Many companies don’t require C-corp status; in fact, incorporating as a C-corp for some companies could be detrimental to their overall financial interests. Filing as an LLC with subchapter S selection or some other type of entity that’s not a C-Corp – especially when there’s no expectation of going public – is often best done in the state where the company is conducting business. Frankly, where you’re incorporated isn’t going to affect the decisions of most people, with the exception of perhaps investment bankers and investors who are considering a fast growth C-corp that is planning on a future IPO – high tech or otherwise.
If you’re a high tech startup with no reason or plans to go public, you should seek legal advice from a home state attorney to explore your in-state options.
Again, these are generalities and aren’t intended to provide specific legal advice or delve into the differences between the corporate laws of different states. I would, however, again emphasize that very often the state in which the business is located is often the best state in which to incorporate.
Have more questions? Feel free to visit LawTrades