Whether you’re a startup founder looking to form a Delaware LLC, a current business owner wondering whether you should change your business entity’s home state, or just curious, you’ve probably noticed that many corporations are incorporated in the state of Delaware. Believe it or not, 64% of the Fortune 500 are Delaware corporations, despite the fact that they weren’t founded in Delaware and have no particular connection to the state. There are a number of good reasons for this, and if you’re considering forming a corporation or a Delaware LLC, it might be worth considering the advantages that Delaware has to offer.
1. The Delaware Court of Chancery
The Delaware Court of Chancery is a state court in Delaware that is entirely dedicated to resolving internal business disputes. Unlike most states, where business entities seeking to resolve lawsuits involving internal business affairs must submit their case before courts which, in many cases, handle almost every other type of legal case there is, the Court of Chancery considers only matters related to business entities. This specialization gives the judicial bench unique experience in resolving matters of corporate law. Judges also resolve the majority of matters brought in chancery court–there are no jury trials. This is more efficient and preferable in the eyes of most business entities.
2. Extensive corporate legal precedent
The large number of corporations and other business entities formed in Delaware produce a large amount of litigation, meaning that Delaware has a wealth of decisional case law second to none. Because most types of disputes have arisen before, judges can resolve disputes more easily and effectively by relying on past legal precedent.
3. No state income tax for corporations
While Delaware does impose a modest franchise tax on business entities formed there, they do not impose a state corporate income tax on companies that do not transact business in the state.
4. Flexible statutes for the Delaware LLC & Corporations
The Delaware Code imposes minimal regulation on the structure and organization of business entities formed in Delaware. Unlike some states, companies need not identify multiple corporate officers and filing requirements are minimal.
5. Privacy concerns
Unlike many states, Delaware does not require principals or members of business entities to be identified in formation documents. This means that you can form a Delaware LLC or a corporation without making your name or address available to the public. For some businesses, this level of privacy is important.
6. Investors’ preferences
Angel investors and VCs often prefer Delaware corporations, for all of the reasons listed above. Many startup founders incorporate in Delaware simply because they are seeking seed funding from these investors.
This list certainly isn’t comprehensive–there are a number of other reasons businesses choose to form their business entity in Delaware, including the efficiency of the Delaware Corporations Division, the availability of expedited filing services, and the wide variety of corporate services (such as resident agent services) available in the state.
Whether a Delaware corporation or a Delaware LLC is the right choice for your business is a different question entirely, and depends significantly on your long-term goals and your current needs. Generally speaking, the benefits of Delaware corporate law and procedure benefit larger companies more than they do smaller ones. Smaller corporations or LLCs are unlikely to worry about shareholder lawsuits as much as big industry does, for example. On the other hand, you might be very attracted to the idea of forming an LLC that doesn’t bear your name anywhere on its face. Whatever you decide, make sure you consult with an experienced attorney beforehand.