Why do so many businesses incorporate in Delaware?

A majority of public companies and fast growing startups have been incorporating in Delaware for decades. Serving as the birthplace for companies has been the business of Delaware since 1792, when it established its Court of Chancery to exclusively handle business affairs.

By the early 1900s, companies from New York, Philly and the rest of the country caught wind of Delaware’s General Corporation Law, which was passed in 1899 and modeled after similar lax laws passed earlier in New Jersey. Over time, Delaware has continued to strengthen its appeal to companies. Here’s what to like about a Delaware C-Corp:

 

  • The laws are flexible (and advantageous) for businesses. Corporations usually have to abide by a series of rules and formalities. Not in Delaware; C-Corps in this tiny state have a ton of discretion in terms of how to run things. Shareholders of the corporation can decide if and when they’re going to have meetings, and can agree to do so electronically. In lieu of formal meetings, directors and/or shareholders may act “by unanimous consent.” It’s also very easy to change ownership and members of a board of directors in a Delaware C-Corp, which is important to investors.
  • The Court of Chancery is in a league of its own. Owners don’t typically think about a state’s court system when they form a business, but they should when it comes to Delaware. A frivolous lawsuit can really impact the livelihood of a business so this pro-business court is attractive to many owners. This equity court focuses solely on business law for Delaware’s corporate statutes. Rather than relying on unpredictable juries, judges are the sole decision-makers. The Court of Chancery prefers to rely on 200 years of legal decisions as opposed to litigation and juries. Luckily for businesses, the favorable precedent seems to deter plaintiffs from commencing lawsuits as the court has kept the number of new lawsuits under 5,000 for each of the last ten years.

 

  • Money, money, money. Probably numero uno for most businesses. Delaware is attractive if you plan on seeking funding from venture capitalists (VCs) and/or angel investors. Many VCs and investment banks require startups to incorporate in Delaware for a host of reasons, including the limit on liability for directors and officers and the ease in making ownership arrangements and changes. It’s much easier for an investor to exit a corporation than it is a limited liability company. Many investors have their endgame in mind way before they ever agree to invest their funds. A C-Corporation usually has to be part of that endgame.

Setting up a C-Corp in Delaware isn’t for everyone though. It’s important to speak with a seasoned business attorney about the specifics of your company to determine the best route to take.