For years, people who are starting corporations in the USA have been told to register in Delaware. That state has traditionally been known as one of (if not the) most business-friendly jurisdictions throughout the country, and there are several key reasons why.
Court of Chancery
The Court of Chancery was established in 1792, and over the last two and a half centuries has issued some of the most well-known decisions in corporate law of any judicial system in the United States. As a result of the breadth of knowledge and expertise held by the judges serving on the Court of Chancery, and the integral part that Delaware has played in the formation of corporate law in the U.S., not only has Delaware created an standardized body of case law that’s known to attorneys everywhere, but courts in other states will often look to Delaware decisions when facing new issues.
The corporate laws of Delaware have been established through both Court of Chancery cases and statutory regulations. The Delaware legislature has always been cognizant of the role that it plays in the formation of corporate law, and as such Delaware has taken a unique approach. In particular, Delaware corporate law serves more as a set of guidelines than requirements. For example, corporations that are formed in Delaware have great latitude to structure themselves internally through the use of committees and to limit the liability of directors and officers.
In addition to the latitude that the corporate statutes afford corporations, Delaware is also attractive because it allows a corporate entity to change its structure. Unlike in most states where once a corporation (or other entity, such as an LLC) is formed, the only way for that corporation to become an LLC, for instance, is by forming a new LLC and merging the two companies together. Delaware, however, permits a corporation to transform itself into an LLC (or other alternative entity) and vice versa.
Delaware is among the cheaper states to register a new corporation and, if your corporation will actually be doing business outside of Delaware, then it will not pay any income taxes to Delaware. The one area where Delaware is not unique, unfortunately, is that all corporations that are not doing business in DE must pay an annual franchise tax.
In conclusion, Delaware has rightfully earned its reputation as a business-friendly state and an attractive location for anyone thinking about forming a new corporation.
If you plan to raise money from outside investors, incorporating in Delaware is the common choice. Delaware has a well understood body of corporate law and familiarity is important when you are asking for money. If you incorporate your startup in Ohio or Colorado, venture capitalists may be weary due to their lack of knowledge regarding that state’s laws. You want to eliminate any obstacles a business entity or state of incorporation may cause in order to minimize the friction between investor and founder.