TOP 8 REASONS TO CHOOSE DELAWARE LAW TO FORM YOU STARTUP
When it comes to forming a company, startup founders are faced with an important decision: which jurisdiction should they choose for their business? While incorporating under the law of their state of residence may seem like the logical choice, Delaware law has gained significant popularity among startup founders. In fact, many startups in California, New York, and other states form their corporations or LLC's under Delaware law. In this blog post, we will explore the top eight reasons startup founders may want or need to form their company under Delaware law instead of the law of their own state of residence. Understanding these advantages can help founders make an informed decision that sets their startup on the path to success.
I have been representing entrepreneurs and startups on entity formation and related matters for over 20 years, guiding and counseling clients through the process, proactively ensuring all forms, documentation, and other necessary legal information and strategies are in place for a successful venture. If you are looking to launch a Startup venture in New York or in Los Angeles or Ventura County, California or in any other state and are curious about forming a Delaware corporation or limited liability company ("LLC"), I can help you identify the most advantageous business structure for you, and help you perfect, qualify, organize, and capitalize your new business.
To set up a Free Consultation, click on the phone number in the header above, or dial me directly at 310-567-5966 (California), 212-414-5966 (New York) or 888-774-1474 (Toll Free). Or click here to schedule an appointment directly
First, Why Not Choose Delaware?
While Delaware is a popular choice for many startups, there are instances where forming a new business in Delaware may not be the optimal path. Factors to consider include the additional costs associated with incorporating and maintaining a presence in Delaware, such as franchise taxes and registered agent fees. It's important to note that incorporating in Delaware does not exempt businesses from paying taxes in other states where they operate, nor does it provide a means to hide income or evade tax obligations. Other reasons why a new business may not want to form in Delaware could include not seeking third-party funding or having only one owner. Startups should carefully evaluate their specific needs, such as operational scope, ownership structure, funding requirements, and cost considerations, to determine the most suitable jurisdiction for incorporation. Consulting with legal and tax professionals can provide valuable guidance in making an informed decision tailored to the unique circumstances of the business. Now, lets look at why Delaware is such a common choice of law for forming corporations and limited liability companies.
Why California and New York Founders Choose Delaware
Investor Preference and Market Perception
Although each of the reasons mentioned here for choosing Delaware as the jurisdiction for forming a new business venture is understandable, they are the reasons investors tend to prefer Delaware. In turn, this first reason is what often drives the decision of founders to follow common legal advice to form their startup under the Delaware General Corporation Law (the "DGCL"). Many venture capitalists and institutional investors have a strong preference for Delaware-incorporated companies. Delaware's long-standing reputation as a favorable jurisdiction for businesses, coupled with its robust legal framework, instills confidence in investors. They are familiar with the DGCL, relevant court decisions, and other related laws. This familiarity tends to streamline due diligence processes and provides a level of comfort and familiarity when evaluating investment opportunities. Being incorporated in Delaware enhances credibility during fundraising rounds, IPOs, or acquisitions, thanks to its widespread recognition and respect within the business community.
Protection of Directors and Officers
Delaware law provides substantial protection for directors and officers. The DGCL offers strong deference to the business judgment rule, limiting personal liability for directors and officers acting in good faith. This protection attracts experienced individuals to serve on boards and take leadership roles within startups, as they can operate with a reasonable level of assurance. Clear guidelines for fiduciary duties further aid directors and officers in making informed decisions while safeguarding their interests.
Flexibility in Corporate Governance
Delaware law offers founders unparalleled flexibility in designing their company's governance structure. The DGCL provides a comprehensive set of default rules that can be customized through bylaws and articles of incorporation. This flexibility empowers founders to tailor their governance framework to their unique business needs, aligning it precisely with their vision and long-term goals. Whether it's defining voting rights, board composition, or decision-making processes, Delaware law allows startups to create a governance structure that suits their specific requirements.
Business-Friendly Legal System
Delaware is renowned for its business-friendly legal system, making it an attractive jurisdiction for startups. Its Court of Chancery, a specialized business court, offers expertise in resolving complex corporate matters. The experienced judges provide consistency and predictability, fostering confidence among investors and stakeholders. This robust legal infrastructure ensures a fair and efficient resolution of business disputes, reducing uncertainty and promoting a favorable business environment.
Efficient Services from the Secretary of State's Office
Delaware's Secretary of State's office provides efficient and streamlined services for business formation and maintenance. The office is known for its responsiveness, expedited processing times, and user-friendly online systems. Founders benefit from easy access to services such as entity formation, annual reporting, and name reservation. This efficiency reduces administrative burdens and allows founders to focus on building their startup without unnecessary delays or complexities. The efficient services from the Secretary of State's office complement Delaware's overall business-friendly environment, further facilitating the company formation process.
Extensive Case Law and Legal Expertise
Delaware's rich history of corporate law precedents ensures a wealth of case law available to guide startups. This abundance of legal expertise, combined with the availability of experienced attorneys specializing in corporate law, facilitates prompt and effective resolution of complex legal matters. The ability to tap into this vast pool of knowledge and resources provides invaluable support to startup founders during critical stages such as fundraising, mergers, and acquisitions. Delaware's extensive case law helps startups navigate legal challenges and make informed decisions, minimizing legal risks.
Efficient Court System
Delaware's Court of Chancery is known for its efficiency in handling business cases. The court's expertise and specialized focus enable it to resolve disputes swiftly, avoiding prolonged litigation processes. This efficiency benefits startups by saving valuable time and resources, allowing them to concentrate on their core business operations rather than being entangled in lengthy legal proceedings. The expeditious nature of the Delaware court system is a significant advantage for startups looking to resolve legal disputes promptly.
Established Precedence in Corporate Law
Delaware has a well-established reputation as the leading jurisdiction for corporate law. Over the years, countless high-profile companies have chosen Delaware for incorporation, resulting in a robust body of case law and a favorable legal climate. The presence of established precedents and a comprehensive legal framework provides founders with clarity, predictability, and guidance, enabling them to make informed decisions and navigate complex legal landscapes more effectively. Delaware's rich corporate law heritage sets a reliable standard for startups, allowing them to operate within a well-defined legal framework.
Forming a startup under Delaware law offers numerous advantages that can significantly benefit founders in their entrepreneurial journey. Delaware's business-friendly legal system, flexibility in corporate governance, investor preference, protection for directors and officers, extensive case law, efficient court system, established precedence in corporate law, and efficient services from the Secretary of State's office create an ideal environment for startups to thrive and grow. By choosing Delaware law, founders can navigate the complexities of the business world with confidence, maximizing their chances of success.
If you are launching a startup venture, do it intelligently. I would love the chance to get to know you and your business, for you to consider me a resource for startup legal services to help you establish a solid foundation on which to build your venture. Click here to make an appointment now for a free consultation, or call me at 310-567-5966 (California), 212-414-5966 (NYC) or 888-774-1474 (Toll Free) to schedule a Free Consultation.
I have become very impressed with the efficiency possibilities of AI. So, I gave ChatGPT a try. I generated this text in part with GPT-3, OpenAI's large-scale language-generation model. After it generated its own draft language, I reviewed, edited, revised, and expanded on it to my own liking and to ensure accuracy in all material respects. WLF takes ultimate responsibility for the content of this article.
This article is not legal advice, but is provided for general information purposes only: see the disclaimer in the footer of this site, and read Legal Notices here.