Many entrepreneurs will choose their home state when incorporating. Usually, the administrative cost is less if they incorporate in their home state. Choosing a different state might also entail additional legal costs, franchise taxes, and other costs. So why is Delaware so popular for incorporation?
Go with the crowd
More than half of publicly-traded U.S. companies are incorporated in Delaware (including more than 60% of the Fortune 500). Now that doesn’t mean that you have to blindly follow the crowd, but if these companies have done their homework and incorporated in Delaware, then it’s fair to say that these larger companies found it in their best interests to do so. If it works for Facebook, then it may work for you!
Delaware laws are designed to be business-friendly. The laws are designed to be flexible with respect to structuring business entities and allocating the rights and duties of shareholders.
Litigation involving corporations often takes place in the Chancery Court where a Chancellor or Vice Chancellor presides. There are no jury trials. There are at least two benefits to this.
First, the presiding Chancellor or Vice Chancellor is a trained expert with many years of experience litigating and presiding over corporate disputes. Second, since there are no jury trials, there can be no runaway jury. Awards are less likely to be so onerous as to put a startup out of business.
Believe it or not, customer service matters. Delaware’s Division of Corporations is responsive and many filings can be looked up online. Some states, including California, don’t yet have a way to look up company filings online.
VCs might require startups to incorporate in Delaware before investing in the company. So whether or not a startup initially incorporates in Delaware, it might have to do so at some point in the future.