Why are So Many Corporations Formed in Delaware?

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I recently answered the question “Is it best to form an LLC in Delaware?” on Quora. In response to a user comment, I opined on why so many corporations are formed in Delaware. My opinion, slightly edited, is reproduced below.

First, I’ll point out that I have what may be a minority opinion, so others may well disagree.

My opinion is closely tied to the types of clients that I typically have: Small startups and early-stage companies that will never seek or receive institutional funding, that will never go public, and that don’t need to put time, energy and money into theoretical legal issues that are likely never to be of consequence to the success of their businesses.

There are good reasons to be a Delaware corporation if you want to maximize board power and flexibility relative to shareholders’ rights and, accordingly, minimize board liability for decisions it has made. (See “Directors? Fiduciary Obligations: Delaware vs. California“.) In my experience, most companies do not fall into that category.

Beyond that consideration, I think most people (non-lawyers, especially) who choose DE do so out of ignorance, or because they heard somewhere that DE is where corporations are formed.

For example, I have a client for whom I formed two corporations. He had heard from one of the large international accounting firms that DE was where his corporations should be formed, so he insisted on DE, which is where I formed the corporations. He doesn’t mind paying fees in two states.

There is one area where DE stands out, though I have yet to see a client for whom this was important: If you need a corporation formed ASAP (within minutes), DE is the place to go.

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Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

6 comments

  1. [...] D. Why are So Many Corporations Formed in Delaware? Retrieved December 4, 2011, from http://danashultz.com/blog/2010/08/24/why-are-so-many-corporations-formed-in-delaware/ Gabriel Rotman Gabriel Rotman is an online business specialist. He helped advance the [...]

  2. SAM says:

    Interesting, so if a company is incorporated in delaware but had a bank and one of the officers in california , do they need to file taxes in CA and also incorporate in cA? what happens if they found this 2 -3 tax years later , are there any remedies

  3. Quora says:

    What are the benefits/disadvantages of setting up a business as a Delaware C Corp versus doing so in another state?…

    Based on my experience working with clients, here is a simple test that should work for most startups: * If you expect to try to raise money from institutional investors (e.g., VCs), incorporate in Delaware. * Otherwise, incorporate in the state where …

  4. Quora says:

    What are the relative advantages and disadvantages to having a Delaware Chancery Court adjudicate litigation concerning incorporation?…

    For a typical startup, there are no advantages or disadvantages – Chancery Court is irrelevant. In my opinion: * Most founders who choose DE on their own have no idea why they are doing so. They simply understand / believe that DE is what “everyone” …