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Why (not) Incorporate in Delaware?

Delaware Division of Corporations logo

Let’s assume that you are starting a new business in the San Francisco Bay Area (where I live and work). And let’s assume, further, that you have decided to form a corporation to establish limited personal liability and to provide an easy way to accept investment capital, if and when appropriate. Should you form the corporation in Delaware or in California?

Registered agents in Delaware cite a variety of reasons for incorporating there. Those reasons tend to fall into two categories:

  • Delaware corporate law is well established, widely known, and quickly applied by Delaware courts.
  • A registered agent can complete the incorporation process quickly.

Yet those benefits do not represent a huge difference from incorporating in California. California corporate law also is well established, and four-hour expedited incorporation is available.

More important, a Delaware corporation that is doing business in California needs to “qualify” (register) in California, anyway (Corporations Code Section 2105). The result: Annual obligations to pay franchise taxes and update corporate information in two states rather than one!

Furthermore, California provides protections that may be important to the company’s founders. Assume that, down the road, investors (with preferred shares) own a majority of the company’s shares, and that the investors decide to liquidate the company, but the founders (with common shares) object. With a Delaware corporation, the liquidation will proceed because only approval of a majority of all shares is required (General Corporation Law Section 271[a]). But with a California corporation, each class of shares must approve the liquidation (Corporations Code Sections 1001 and 152), so the founders will prevail.

In light of the foregoing, most of my clients decide to incorporate in California rather than Delaware.

Related posts:

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

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Business Entities
  1. 9/25/2013 | 3:12 pm Permalink

    What do you think about his points here – http://capgenius.com/2011/03/15/incorporation/

    • 9/25/2013 | 3:34 pm Permalink

      Standard list of “corporate law” justifications. I have formed many corporations in DE, and many in other states, depending on the client’s requirements (please see the Related Posts referenced above). To say that every corporation, irrespective of its ownership and business operations, should be formed in DE is ridiculous.

  2. 11/6/2013 | 6:42 am Permalink

    I’m about to form an LLC in Delaware. The sole purpose of doing that is to purchase a EU based company. I was told about $250 franchise fee, $167 Registrered Agent fee, $377 Initial formation fee that should give me the kit and all the papers required including EIN.

    Questions are:

    1. I need to pay franchise tax and registered agent, registered agent is not a problem but $250 yearly tax should be paid off my company account most likely. Do I need to obtain any business license at all if I only send money to my Delaware LLC to pay that tax?

    2. Are there any other HIDDEN Government fees ?

    THanks!

    • 11/6/2013 | 3:23 pm Permalink

      Your questions probably should be answered by an accountant / tax advisor rather than a lawyer.

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