Delaware 101: Why Is Everyone Incorporating There?

delaware-incorporatingWhether you started thinking about incorporating earlier this morning or you’re a serial founder about to launch your fifth unicorn, the Delaware incorporation might seem like an odd phenomenon. We often hear “Why do so many companies incorporate in Delaware?” and “I’m a proud Californian—I’ve never even heard of Rehoboth Beach!” While there are situations where we advise clients to incorporate in states other than Delaware, the truth is that Delaware is often the best choice—and likely not for the reasons you may have heard. For example, Delaware does not have special rules allowing secret corporations, is often not the cheapest jurisdiction for incorporation, and is not some sort of tax haven. That being said, setting up shop in Delaware does offer compelling perks.

Predictability and familiarity are valuable. When it comes to launching your company, building out your idea, and pulling together your team, you’re already taking on huge risks and we’re guessing you don’t want to add unnecessary legal risk just for fun. Delaware has been the go-to jurisdiction for incorporation for decades, meaning the state courts and the statutory law behind them have been detailed extensively. The bottom line? You and your attorneys are more likely to know what to expect and more likely to be able to predict and avoid problematic issues with confidence. This translates to less money spent on legal fees and more nimble decision-making.

Better Law for Businesses
Why do companies incorporate in the first place? For startups, the calculus on whether to incorporate is often about when you start taking on risk: founders who are ready to start hiring, are developing an idea among several co-founders, or are about to launch a beta product to consumers. While all of these scenarios offer a different type of risk profile, Delaware law is among the strongest in the country for respecting the boundaries of the corporate entity. This means that, in most cases, while the hard-earned money that you’re putting into the business may be at risk, your personal checking account and your home are not. It also helps reduce the likelihood of conflict between co-founders or between founders and investors, something that can quickly spell disaster for a fledgling company.

Like a Well-Pressed Shirt at an Interview
Because of the reasons above, angel investors and venture capital firms like investing in Delaware corporations. We know you spend countless hours perfecting your idea and investor pitch. Picking a familiar jurisdiction to incorporate is just one more way to signal to investors that you’re competent, capable, and you’ve done your research.

But I’ve Already Incorporated Somewhere Else!
Now that Delaware is probably starting to sound enticing, you may be wondering if you might have screwed up by already forming an entity in a different state. Don’t worry! One of the items we often help our startup clients with is setting up a reincorporation into Delaware. If you’re growing fast and looking to raise money from large investors, a Delaware reincorporation is often at the top of a founder’s to-do list. Our attorneys are more than happy to walk through your short- and long-term goals and see if this is the right move for you.

Book My Flight to Dover
TL;DR: Talk to your attorney first, but incorporating in Delaware is often cheaper, more familiar to attorneys (meaning, it’s cheaper), better protects your business, and investors will likely expect it.


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