In 2023 the Delaware Division of Corporations reported that 67.6% of Fortune 500 companies were incorporated in Delaware. But why do so many businesses, especially startups, choose to incorporate in Delaware? One common misconception is that it's due to tax advantages-- which aren't necessarily true. Instead, there are five main reasons why startups incorporate in the state of Delaware.
#1: Historical Precedence
Incorporating a business was not always an easy process in the United States. Prior to the late 1800s, an organization needed to obtain state-level legislature approval to become a corporation, and corporate status was only granted to companies whose primary purpose was in the best interest of the public. That changed in 1875 when New Jersey became the first US state to allow an organization to incorporate for any lawful intention.
Delaware followed New Jersey’s example and passed the Delaware General Corporation Law in 1899. But Delaware went one step further by intentionally charging lower incorporation fees to lure new businesses away from other states. This strategy worked, and over time as more and more businesses incorporated in Delaware, the state’s pro-business reputation grew. But low fees were not the only reason businesses were attracted to Delaware.
#2: The Court of Chancery
Delaware created a separate court dedicated solely to deciding corporate legal matters, called the Court of Chancery. As more businesses incorporated in Delaware, more cases came before the Court, creating a robust body of case law and a reputation for judicial expertise in business matters.
Cases brought before the Court of Chancery are decided by a judge, not a jury. Judges on the Court are known for their proficiency in corporate law and can offer speedier decisions since they focus only on business-related cases.
#3: Business-Friendly Laws
Delaware’s leaders and constituents recognize the income generated from incorporation fees and franchise tax are a fundamental component of the state’s budget. In the last 130 years or so since the 1899 law was passed, Delaware’s legislature has maintained and enacted further pro-business legislation.
Delaware’s original law included ground-breaking provisions protecting directors, officers, and employees from legal liability related to the business that employs them. Unlike many other states, Delaware does not require the disclosure of the names and addresses of owners or shareholders to protect their privacy. Delaware also offers businesses greater flexibility in terms of corporate governance and structure.
#4: Tax Advantages (Sort of...)
Businesses incorporated in Delaware that do not conduct business in Delaware are exempt from paying state corporate income tax. Corporations that do conduct business in the state are only taxed on income that was earned within the state.
As "pass-through" entities, Delaware LLCs are not required to pay income tax at all. Instead, the profits or losses are reported on the personal tax returns of the LLC’s owners.
Delaware does not charge sales tax, and intangible property like patents and trademarks are exempt from taxation as well.
#5: The Delaware Division of Corporations
Most state agencies are not typically recognized for their innovation or efficiency. However, Delaware’s Division of Corporations – which handles annual filings, collects franchise tax and fees, and maintains corporate records – is an exception. Administrators have been quick to adopt new technology and efficiency practices, especially online services.
Annual Franchise Tax Reports are due on the same day each year, are simple to complete, and can be filed online. Document requests are handled by a separate team and can turn around requests in as little as 24 hours.
What about Disadvantages?
Does incorporating in Delaware have any disadvantages? For some businesses, the answer is yes. A business incorporated in Delaware will need to register as a “foreign corporation” in its home state. A foreign corporation is likely to incur foreign qualification costs on foreign corporations on top of the fees and franchise tax already charged by Delaware. Staying current with multiple state filing requirements can also be burdensome and expensive, especially for small businesses.
