I am licensed in Delaware (and Texas). Delaware is the heart of corporate law in the States. Close to 2/3 of Fortune 500 companies are incorporated in Delaware. And, more than 1 million companies call Delaware home (for purposes of incorporation, not necessarily where they are physically headquartered).
So, obviously, I am going to tell clients that it makes sense to incorporate their businesses there, right? Wrong.
Well, generally wrong, at least.
First, Some History:
A little over 100 years ago, New Jersey was the de facto state of incorporation for all the major companies – DuPont, General Motors, and Standard Oil among them. In 1911, then governor of New Jersey, Woodrow Wilson, waged a public campaign against the loose New Jersey rules governing corporate behavior. Apparently Wilson was motivated by a desire to appear strong against business for his upcoming campaign for President. Public sentiment was increasingly negative with respect to the monopolistic business trusts that existed back then.
New Jersey changed some laws, Wilson won the Presidency, and the seat of corporate America shifted to “The First State,” Delaware. Delaware had recently more or less copied the “loose and enabling” corporate laws that Wilson rallied against in New Jersey.
Public and other companies that anticipate shareholder lawsuits choose Delaware because it has a special type of court called the Court of Chancery. This court has no jury system, is able to give out equitable remedies (not just money damages) to prevailing parties in a lawsuit, and its five judges are super well-informed when it comes to complex business litigation.
Delaware is home to a whole slew of credit card companies because they were one of a few states to lead the pack in loosening up maximum rates credit cards could charge customers.
Delaware is also typically on the cutting edge when it comes to new corporate entity types, other useful business mechanisms, and corporate laws generally. In 2013 Delaware made it possible for business owners to form benefit corporations.
Benefit Corporations:
Benefit corporations are a new, exciting type of business entity that is not available in all states. So called “B-corps” give executives the ability to consider the interests of its employees, communities where it operates, and other stakeholders when making corporate decisions (if you want to read more about B-corps, take a look at my blog post : Corporate Law Gets Progressive – All About B Corps
Takeaway:
Delaware is awesome when it comes to corporate law. But, here’s the thing. If you are not a large company with the real risk of complex shareholder litigation, a credit card company, or interested in forming a benefit corporation but located in a state that doesn’t allow them, then Delaware doesn’t have that much to offer you.
If your business is located in a state other than Delaware, incorporating in Delaware just means you will have to deal with paperwork and annual fees in your home state as well as Delaware. Arguably, there is some small amount of prestige that comes with Delaware incorporation, although I personally think this is a minor consideration, unlikely to ever translate into any additional opportunities for a particular business, and not worth paying for.
Keep in mind that as your business grows, if you see a more compelling advantage to being incorporated in Delaware, you can re-domicile (a fancy word for “transfer”) your incorporation to Delaware.
DISCLAIMER: This is general info. Know your own situation. It is always best to hire a lawyer for your specific issues. In the end, I am trying to help you, so don’t sue me. Instead, hire me.
Author: Brett Cenkus
Brett Cenkus is a business attorney with 18+ years experience based in Austin, Texas. He has worked with a variety of businesses and has clients throughout Texas as well as many technology clients throughout the United States. Brett is a Harvard Law graduate with a sharply seasoned mind and an entrepreneurial heart. As a founder of 6 companies himself, he is especially passionate about helping startups succeed. In 2016 Brett was named the winner in the Individual category for RecognizeGood’s Ethics in Business & Community Award. He offers businesses solutions that are in sync with their culture, goals and values. You can learn more about Brett by visiting the About page on this website.