Incorporate in Delaware
The right answer for companies raising institutional investment, and an expensive habit for almost everyone else.
Why founders choose Delaware, and when they should not.
- Country
- United States
- Usual entity
- Corporation
More than half of large US public companies are incorporated in Delaware, and venture investors will generally expect a Delaware C corporation before they will paper a round. The reasons are real. Delaware corporate law is unusually developed, the Court of Chancery hears business disputes without a jury and produces a large body of settled precedent, and the Division of Corporations is fast and predictable.
None of that helps a two person consultancy. Predictable corporate case law matters when there are minority shareholders, preferred stock and board disputes. When there is one owner and no investors, you are paying an annual franchise tax for a benefit you will never use.
The honest test is whether outside investment is genuinely coming within about eighteen months. If it is, incorporate here and save the later conversion. If it is not, Delaware is usually a more expensive version of your home state.
Who Delaware fits.
Delaware usually suits
- Startups raising venture capital or angel investment
- Companies issuing stock options to employees
- Businesses with several shareholder classes or a real board
- Companies where an eventual acquisition or public offering is a genuine plan
Filing in Delaware, step by step.
The sequence specific to Delaware, including the parts that differ from other jurisdictions.
- Order matters
- Doing these out of sequence causes rework
- 1Structure
Decide authorised shares and par value before filing
This is what drives the franchise tax calculation later, and a filing with a very large authorised share count and no par value produces alarming bills under the default method.
- 2Name
Reserve or clear the name with the Division of Corporations
Delaware processes this quickly.
- 3Certificate
File the Certificate of Incorporation
Same day and one hour expedited options exist at additional cost and are genuinely same day.
- 4Organisation
Hold the organisational meeting: adopt bylaws, appoint directors and officers, issue shares and open the stock ledger
A Delaware corporation that skipped this is a shell with a certificate.
- 5Qualification
Register as a foreign corporation in the state where you actually operate
This is the step people forget because Delaware felt like the whole job.
What a Delaware entity owes each year.
- Missing one
- How we track these
| Obligation | Who wants it | When and how much |
|---|---|---|
| Franchise tax and annual report | Division of Corporations | Annually by 1 March for corporations. Due whether or not the company traded |
| Registered agent | Your agent | Annually, and Delaware agents are typically priced above the national average |
| Foreign qualification | Your operating state | Annual report and fees in that state too |
| Federal return | IRS | Form 1120 for a C corporation, or 1120-S if the S election was made in time |
Delaware against your home state
- Honest comparison
- Including where another jurisdiction wins
For a company with investors, Delaware is not really competing with your home state. It is a requirement of the funding process and the comparison does not arise.
For a company without investors, the comparison is stark. Incorporating in Delaware and operating from Georgia means a Delaware franchise tax, a Delaware registered agent, a Georgia foreign qualification, a Georgia annual registration and a Georgia registered agent. You have doubled the recurring administration to obtain governance case law you will never invoke.
The test we apply is simple. If a term sheet is being negotiated or an accelerator has accepted you, incorporate in Delaware now and save the conversion. If a raise is something you hope happens in a few years, form where you are and convert if and when it becomes real. Conversion is a known, priceable exercise.
What people get wrong about Delaware
The franchise tax surprises people every year
It is due annually whether or not the company traded, and the default calculation method can produce an alarming number for a company with many authorised shares. There is an alternative calculation that is usually far lower, and knowing to use it is the difference between a modest bill and a shocking one.
You still register where you operate
A Delaware corporation running its business from Texas is doing business in Texas and generally must foreign qualify there. Delaware is where the company exists in law, not a way of avoiding the state you are actually in.
Delaware for an LLC is rarely the win it is for a corporation
The case law advantages are largely about corporate governance. A single member LLC with no investors gets very little of it while paying the annual fee.
Delaware questions
Do I have to incorporate in Delaware to raise money?
Not legally, but practically it removes friction. Investors' documents assume it, and converting an LLC or an out of state corporation during a round costs legal fees and time at the worst possible moment.
Can a foreign person own a Delaware corporation?
A C corporation, yes, with no restriction. An S corporation, no, because S corporation shareholders must be US citizens or residents.
Is the franchise tax based on profit?
No. It is calculated on shares or on assumed par value capital, not on income, which is why a company with no revenue can still receive a substantial bill.