One of the early decisions you need to make when launching a new business is where to start. You may think that the best place to incorporate your business is simply in your home state or a big state that has lots of large businesses such as California or New York. You might be right, unless you were thinking California or New York – in that case you’d almost definitely be wrong.
This is Delaware vs. all others.
Delaware has historically relied on convenient and straightforward corporate legislation to drive business into the state. For a variety of reasons, including its small size, the Delaware legislature is high-functioning as compared to other state legislatures. Delaware also relies heavily on the franchise taxes generated from being the leader in corporate law and provides a serious incentive for the state to maintain its supremacy in that area. All of that combined means that the Delaware legislature responds quickly to update its corporate law and correct the courts asap in the event laws are applied in a way that the legislature did not intend.
Over time, the Delaware chancery court has become known as the best corporate court in the United States due to the expertise of their judges, speed with which they adopt new business laws and policies, and ease of doing business.
For businesses that are pitching to investors, incorporating in Delaware is a de facto requirement. This is because having a uniform, predictable and highly-regarded corporate legal system is very important when millions of dollars are on the table. That’s also why large corporations that are headquartered elsewhere are almost always incorporated in Delaware. For example, when you think of Walmart, Amazon and Google you may remember that these businesses were founded or have large headquarters in Arkansas, Washington and California. However, they are all incorporated in Delaware.
This isn’t to say that there aren’t any benefits to incorporating in your home state or that your business won’t be able to raise money if you’re not incorporated in Delaware. By starting your business in your home state, you will actually save some money in franchise taxes and could have a “home town advantage” for raising funds locally, particularly with respect to certain grant programs. For lifestyle businesses such as mechanics, bakeries and for most professional services such as lawyers, accountants and doctors, it makes a lot of sense to just form your entity in your home state.
Hopefully this summary on the topic of choosing state law is helpful, but obviously we can’t cover all considerations in a 2 minute video. If you have specific questions please feel free to reach out to us at fourscorelaw.com.