Key Takeaways

  • Delaware startups attract investors due to predictable corporate law, strong legal precedents, and flexibility in governance.
  • The Delaware Court of Chancery provides efficient, judge-only business rulings, which reduces uncertainty for corporations.
  • Founders benefit from flexible board structures, privacy protections, and personal liability shielding.
  • Tax treatment can be favorable, though franchise taxes may be significant depending on company size and capitalization.
  • Delaware’s reputation as the “corporate capital” makes it easier to raise venture capital and eventually go public.
  • While Delaware is advantageous for many startups, not every small business needs to incorporate there due to added costs and administrative requirements.

Delaware startups usually have an easier time with filing and following business law.

Why Startups Incorporate in Delaware

Most tech startups are in Delaware due to finances. Some companies must be formed as a corporation in Delaware to be funded by venture capital firms. These firms know more about corporate law in that state than any other state. Having a corporation in Delaware is ideal for those who are going to need venture capital for funding; other than that, there is no real benefit to incorporating in the state. There are some downsides, such as extra filing fees, and the annual Delaware Franchise Tax.

Delaware’s Reputation as the Corporate Capital

Delaware is often referred to as the corporate capital of the United States because more than two-thirds of Fortune 500 companies and a large portion of venture-backed startups are incorporated there. For a Delaware startup, this reputation provides instant credibility with investors, attorneys, and potential partners. By choosing Delaware, founders are not just incorporating in a state with favorable laws—they are aligning their company with a proven and trusted legal framework that investors have confidence in.

Reasons Why Tech Startups Incorporate in Delaware

  • Companies from outside the country choose Delaware to have the ability to use resources in the US, such as venture capital.
  • Venture capital investors have some set procedures that corporations must follow so they can invest in the companies.
  • Corporate laws in Delaware favor company owners most. These corporate laws are very well known by most corporate lawyers, and courts in other states tend to look to them for guidance.
  • Laws in Delaware are more for the protection of the management of a company than anything else.
  • Stock investors in Delaware get to have special voting rights and the ability to control the corporation.
  • Delaware laws are flexible, which is why most companies go public in the state.
  • The law allows the board of directors to be consist of one member.
  • There is no need for your entity filing to be reviewed by the state.
  • Certain terms and standards have helped to bring down the cost and time needed to legally form a company.
  • Founders are sometimes given free online resources through larger law firms.

Think of your long-term goals when deciding where to create your company. It would also be good to think of who you plan to have as company investors; this can be a good indicator of where you should set up your new business corporation.

Venture Capital and Investor Expectations

For many venture capital firms and institutional investors, a Delaware C corporation is the default choice. These investors prefer Delaware because they are familiar with its statutes and case law, which reduces legal uncertainty. Additionally, Delaware law allows for preferred stock structures, liquidation preferences, and other complex financing terms that investors expect when funding a startup. This alignment with investor norms makes fundraising smoother and often faster for Delaware startups.

Courts in Action

The legal system in Delaware is mostly business friendly. The governing bodies of the state try to keep business laws up-to-date and cater mostly to corporations. Delaware is most known for the Court of Chancery, which deals with any business issues without using trials. Without the use of juries, the Court has taken care of most American corporations.

The Delaware Court of Chancery’s Unique Role

The Delaware Court of Chancery is a specialized court that exclusively handles business and corporate disputes. Unlike other courts, it does not use juries; instead, cases are decided by experienced judges with deep knowledge of corporate law. This makes rulings more predictable, consistent, and efficient. For startups and investors alike, this means that if a dispute arises, it can be resolved quickly and with reduced litigation costs.

Greater Control

Board members in LLCs based in Delaware must place interests back into the company to sell any of them publicly. The law also allows business owners to choose who can enter the board as a voting or non-voting member, and stop a member from publicly selling their interests to people they don't like.

Taxing Issues

Corporations in Delaware face lower tax rates than those in other states. The income tax rate for a corporation is 8.7% of the gross income. The federal corporation tax schedule is broken down by taxable income:

  • Up to $50,000: 15% tax
  • $50,001 - $75,000: 25% tax
  • $75,001 - $100,000: 34% tax
  • $100,001 - $335,000: 39%
  • Over $335,000: 34% tax

A single business owner who files the tax returns under the married, jointly-filed status pays the following taxes:

  • Up to $35,800: 15% tax
  • $35,801-$86,500: 28% tax
  • Over $86,500: 31% tax

Franchise Tax Considerations

While Delaware offers many benefits, startups should not overlook the state’s franchise tax. Depending on the method used to calculate it (authorized shares vs. assumed par value), taxes can range from a few hundred dollars to hundreds of thousands annually for large companies. Early-stage startups often qualify for the lower end of the range, but as a company grows and issues more stock, the franchise tax liability can increase significantly. Founders should plan ahead and consult with legal and financial advisors to avoid surprises.

Personal Asset Protection

LLC owners in Delaware have protection over their assets in the case that your company faces a lawsuit or criminal offense.

Smoother Sailing

The laws in Delaware are aimed to help corporations run better and smoother. Boards of directors can have meetings if one member is absent as long as another member fills in. A certificate of correction is available if there are any spelling or grammar mistakes on a document. Delaware also allows you to change your corporation into another entity with simple procedures to save on time.

Privacy Benefits

Names and addresses of directors in a company do not need to be on formation documents in Delaware.

Ease of Formation and Maintenance

Forming a Delaware startup is a relatively quick and streamlined process. The state offers online filing, same-day expedited services, and does not require extensive disclosure of directors’ or officers’ personal details. Additionally, Delaware corporations and LLCs benefit from simplified annual reporting and minimal ongoing compliance requirements compared to some other states. This makes it easier for founders to focus on building their business instead of navigating complex bureaucratic processes.

One Word of Caution

While the advantages are great for business owners in Delaware, shareholders don't get those same benefits. Shareholders may be taxed higher due to having to dividends they received not being a deductible when filing taxes.

Frequently Asked Questions

1. Why do investors prefer Delaware startups?

Investors prefer Delaware startups because Delaware law is predictable, flexible, and has strong legal precedents that make complex financing deals easier to structure.

2. Is incorporating in Delaware more expensive than in other states?

Yes, Delaware requires additional filing fees and an annual franchise tax, which can be high for larger corporations. However, many startups find the benefits outweigh the costs.

3. Do I need to live in Delaware to form a Delaware startup?

No. Founders can incorporate in Delaware regardless of where they live or operate. Most Delaware startups conduct business elsewhere but choose Delaware for legal and financial reasons.

4. What is the Delaware Court of Chancery?

It is a business-focused court with judges (not juries) that specializes in corporate law disputes. Its rulings are consistent and trusted by investors and founders alike.

5. Should every small business incorporate in Delaware?

Not necessarily. If you don’t plan to raise venture capital or go public, incorporating in your home state may be more cost-effective. Delaware is best for startups with growth and outside investment goals.

If you need help with Delaware startups, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.