Leveraging the Delaware C-Corp
Delaware is the second smallest state by landmass in the United States (the smallest is Rhode Island), yet at the same time Delaware is the largest incorporator of corporations. Massive companies such as Apple, Coca-Cola, Google, and Walmart are all Delaware corporations, to name just a few examples.
Why is Delaware so popular a choice for incorporating a business?
Companies are interested in offering investors the right protections and governance options in order to attract capital. It would be easy for a business to just give the founder all of the power and allow them to grow the business without interference of any kind. However, that setup does not appeal to investors. They have the right to make sure their money is well spent and that the CEO is doing the right thing for the company.
A corporate structure in which all of the power lies in the hands of one founder (or a few) doesn’t always produce the best results. The same is true in government, hence checks and balances.
This is why Delaware is so popular for incorporation: the state was able to create a set of rules that are friendly to investors while also allowing a CEO to successfully operate the business. Most startups in Silicon Valley are incorporated in Delaware because venture capitalists require it. Here are the 5 reasons to incorporate in Delaware:
1. A fast court system
Delaware has created a highly respected court that specializes in corporate law called the Court of Chancery. It is able to resolve complex corporate disputes effectively and efficiently without a jury. Because there are so many corporations in Delaware, there is a good chance that a similar case has been adjudicated in the past, which gives better certainty of the outcome.
2. More privacy
With a Delaware corporation, you do not have to publicly disclose the names of the officers and directors of the company, nor the names of the major shareholders. This last one is important as many investors want to remain private when it comes to deals, even more so if the investment in question is significant.
3. Lower taxes
Delaware does not have a sales tax or a state corporate income tax on goods and services provided by Delaware corporations operating outside of Delaware. This translates to low taxes for businesses, which has an obvious appeal. A 2013 study by ScienceDirect showed that companies that pursued a Delaware-based tax strategy were able to increase their tax savings by 15-24%.
4. Flexible corporate statutes
Officers, directors, and major shareholders don’t have to be residents of Delaware, and the corporation can choose to have only one person be the officer, director, and shareholder of the company, whereas in other states you may need to find several individuals to fill those roles.
5. Fast incorporation
Delaware can incorporate a company in hours.
The perks are clear, but what about the disadvantages of incorporating in Delaware instead of your home state? By being in Delaware, you are still required to register your corporation as a foreign incorporation in your state and pay a franchise tax. You will also pay taxes in your own state. By and large, however, most venture capitalists and savvy investors require a Delaware incorporation. This is no coincidence. They know where they will be getting the best governance and rule of law.