One of the first questions we receive from founders who are ready to legally form a company is where they should incorporate. The conventional wisdom is that for most companies intending to obtain outside financing, Delaware is the correct answer for the following reasons:
- If you anticipate seeking venture capital financing at any point during the lifecycle of your company, it is typically better for you to be formed as a Delaware corporation, since most venture investors prefer to invest in Delaware corporations. Forming your company in Delaware from the beginning will save on the time and expense of a future conversion.
- Delaware has a robust corporate law framework, and a separate court system the Delaware Court of Chancery for handling business law matters, which means that any legal issues that arise will be heard by judges with extensive experience in this area of the law.
- The Secretary of State of the State of Delaware has an efficient system for making the various corporate filings required to form and operate a business. Several states still require that filings be made by mail, or don’t offer any expedited filing services. Delaware has the infrastructure to quickly process filings which saves time during both the formation process, and down the line in future financing rounds.
While there are a few drawbacks to be aware of when selecting Delaware, these downsides are generally regarded as small enough that they don’t outweigh the benefits:
- Companies must qualify to do business in the state where their principal office is located, and any other states where they “transact business.” Assuming your company will be transacting business outside of Delaware, or will have its principal office outside of Delaware, this means you’ll be subject to the registration fees and annual filing fees/taxes of at least one additional state.
- If your principal office is not located in Delaware, you’ll need to select one of the many service providers who act as “registered agents” in Delaware, to receive any legal filings on behalf of your company. This service is another annual expense.
If you haven’t yet decided what type of entity you should form, please see our article on choice of entities for an explanation on why forming a corporation is the right choice for many founders.