Why (not) Incorporate in Delaware?
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.
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.
- Why are So Many Corporations Formed in Delaware?
- How Much Does It Cost to Incorporate?
- In which State should My Startup Incorporate?
- Do VCs care where my company is incorporated?
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.