Next step: You and your co-founders have developed your concept and business plan. Now you want to formally create your startup. To do this, you will need to form your company in the state of your choosing.
So, which state should you choose?
For most startups, especially those that will eventually seek venture capital (VC) financing, the answer is usually a C corporation incorporated in Delaware. For information regarding the differences between C corporations, S corporations and limited liability companies (LLCs), please see What Form Should My Company Take? “C” Corporation, “S” Corporation or LLC?
Why Delaware? While thinking you should incorporate in the state where you are based is natural, your home state is not necessarily the right answer. Similarly, while almost all of the startups we work with incorporate in Delaware, virtually none are actually located in Delaware.
You want to incorporate in a state with well-established and tested corporation law. Delaware’s corporation law has been litigated extensively, and, as a result, there is extensive case law regarding the interpretation and application of the Delaware General Corporation Law (DGCL). The DGCL also provides corporations with greater organizational flexibility than many other state statutes. In addition, Delaware has a separate court designated to decide corporate cases, the Delaware Court of Chancery, whose judges have extensive expertise interpreting and applying corporate law.
You want to incorporate in a state with corporation law that is familiar to most law firms and other advisors. If you pick a state with newer corporation law or a state where very few corporations form, your advisors may need to spend time learning the law of that state, resulting in greater costs. By contrast, if you pick a state with well-established corporate law, like Delaware, your advisors likely will already be familiar with that state’s law.
You want to pick a state that is familiar to most investors, including venture capitalists. Most VCs prefer to invest in Delaware corporations. If a company is formed elsewhere, an investor may condition its investment on the conversion of the company to a Delaware corporation, which can result in delays and increased costs.
You want to incorporate in a state that provides good administrative support to its corporations. Delaware offers expedited filing and quick turn-around times for many corporate filings, which can be very helpful at critical times such as the closing of a financing. In addition, while annual franchise taxes payable by corporations can vary significantly depending on the facts and circumstances involved, Delaware’s tax rate can be lower than other states’ rates.
So … we almost always recommend that the startups we work with incorporate in Delaware. They can then qualify to do business in the state where they are located and in any other states where they will be doing business (see Where Should You Be “Qualified To Do Business” for more information).