Why Is Forming a Corporation in Delaware Ideal for Startups?

Why Is Forming a Corporation in Delaware Ideal for Startups?

19.10.2022 17:16 by Clemta

Incorporation in Delaware is a common practice for most entrepreneurs while starting their global businesses. Still, many founders question why Delaware has the first call or why the company should incorporate at all.

No doubt, such a decision can ultimately have lasting effects, especially when startups are looking for external funding. Delaware is a popular choice for incorporating startups for many reasons, some of which are outlined in this post.

 

1. It's better to invest in Delaware corporations

Startups must be incorporated in Delaware before they will receive an investment from venture capital firms, angel investors, and accelerators. Delaware is a preferred jurisdiction for investors for a variety of reasons, and startup companies that are not formed as Delaware corporations may have difficulty in raising capital.

 

2. Delaware is the most common state of incorporation for public companies

The state has nearly 1.4 million corporations, including almost two-thirds of Fortune 500 companies, and approximately 80 percent of US initial public offerings are registered in Delaware. Due to this common practice, many companies, investors, and attorneys are familiar with Delaware corporate law.

Incorporating in another state immediately sets a startup apart from other companies - which isn't very helpful when a startup is seeking capital.

 

3. A Delaware corporation has more privacy

A Delaware corporation is not required to identify its directors and officers in state filings or on the state's website, which is not the case in many other states.

Further, shareholders are entitled to request the books and records of a corporation under the laws of their state. A request for records in Delaware isn't as easy as it is in some states.

Delaware corporations require shareholders to hire a local counsel and pursue matters in Delaware courts if they dispute a shareholder's request for the corporation's books or records. Shareholders may be discouraged from seeking corporate records due to this lengthy process.

 

4. A business-oriented state

To keep the state's regulations and statutes up-to-date, the Delaware legislature pays close attention to business law developments. Corporate franchise taxes account for approximately 15-20% of Delaware's budget, so maintaining this reputation is vital for the state. Delaware's legislature updates such laws more frequently than other states, which lack expertise or incentives (or both).

 

5. There are separate corporate courts in Delaware

Some courts in Delaware only hear cases involving corporations. Therefore, Delaware courts hear cases from corporate law experts.

In other states, judges are charged with handling matters ranging from criminal law to environmental law or real estate law. In such a situation, litigants lack confidence that a judge will render the right decision.

 

6. You can save money by hiring an attorney who is familiar with Delaware case law

As a result of Delaware's high concentration of companies and its courts focusing on corporate cases, many other states lack such a wealth of precedent and case law. Delaware cases are often cited as precedents by out-of-state attorneys and courts.

In this way, companies can avoid litigation and other potential disputes by taking advantage of established business laws. Delaware's laws and forms have become familiar to most attorneys and investors due to its popularity as a state for incorporation.

Both startups' and investors' ability to understand Delaware laws and regulations, helps them reduce legal costs and improve efficiency. It ultimately allows them to close financings faster than they would have if they had to learn another state's laws, along with potential liabilities and roadblocks associated with that state.

 

7. Delaware is efficient

Compared to other states, Delaware takes far less time to process a company's paperwork - and can do it in one or two hours for an additional fee. When it comes to moving financing or merger along expeditiously, quick turnaround times and responsive state officers in Delaware can be invaluable.

 

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With all the aforementioned reasons, startups tend to incorporate in Delaware ultimately. We are happy to assist you throughout your US journey and handle all formation, taxation, and financial management processes for your business!