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Why So Many Companies Incorporate in Delaware

by Alex Lipton, Legal Researcher at Shake

Why So Many Companies Incorporate in Delaware Wilmington, Delaware

More than 60% of Fortune 500 Companies are incorporated in Delaware. Even early-stage companies operating outside of the state incorporate in Delaware, often because their prospective investors require them to. Let’s look at why so many businesses – and investors – prefer Delaware (hint: it’s not the scenery).

Best Law for Businesses

Delaware features business-friendly laws that shield corporate directors from liability and make it easier for companies to make deals with investors and corporations. For example, directors can include a provision in their corporate charter that eliminates personal liability of directors and shareholders in some situations. Another provision makes it much easier for corporations to secure an affirmative shareholder vote for a merger, ensuring that value-maximizing deals won’t be held up by a few shareholders who disapprove. By making their corporate law appealing and predictable, Delaware has attracted many businesses hoping to limit their legal headaches.

Court Expertise

Would you trust just anyone to judge whether your board of directors made the right decision after a deal went sour? Making business decisions can be difficult – even for directors – so Delaware courts do not allow juries to decide whether these business decisions were rightly made. Instead judges in Delaware called “Chancellors” hear all disputes involving Delaware corporations. These Chancellors are experts in the field of corporate law and often defer to the business judgment of corporate directors, providing companies with ease of mind during otherwise troubling lawsuits.

Tax Benefits

Delaware charges no income tax on corporations that do not operate within the state. Also, due to something known as the “Delaware loophole”, companies can often reduce the tax bill from their home state by shifting assets to Delaware holding companies.

Though these tax laws attract many corporations seeking to reduce their taxes, they have also been criticized. Officials from other states feel that by not imposing an income tax, Delaware effectively robs their states of billions of tax dollars. Nonetheless, when considering the size of their annual tax bills, many corporations opt for the cheaper choice and incorporate in Delaware.

Approved by Investors

Investors in startups prefer Delaware corporations for many of the same reasons business do. This is especially true for early-stage startups hoping to one day go public or be acquired. If a company were to go public, investors would likely require that the company incorporate or reincorporate in Delaware because of the legal and economic advantages. By starting out as a Delaware corporation, early-stage startups seeking venture financing save themselves the trouble – and costs – of reincorporating in Delaware down the road. 

What if I am already incorporated somewhere else?

If you decide that Delaware fits your corporate needs, you can always reincorporate there. But before you decide to reincorporate, consider whether the costs of doing so outweigh the benefits. If you don’t plan to seek venture financing from institutional investors and you conduct all of your business in your home state, then it might not be worth the trouble to reincorporate. If you run a fast-growing startup and plan to seek financing from institutional investors, you should consider reincorporating in Delaware to enjoy the many legal and economic benefits available to you. Talk to an attorney for advice on your situation.

Alex Lipton is a Legal Researcher at Shake and a Mitchell Jacobson J.D. Scholar at NYU School of Law. He also serves as Vice President of Operations for the InSITE Fellowship. His articles focus on legal issues affecting early-stage companies. Find him on LinkedIn or on Google+.