One of the first questions you will need to answer when deciding to start a company is where you want to form your start-up entity. You are not required to form the entity in the state that you reside. You may have noticed that many public and private companies are Delaware companies and that people often recommend Delaware as the ideal state of formation. But why? Here are 5 reasons why Delaware is often the preferred choice:
- Reputation. About one-half of all US companies, one-half of all US public companies, 60% of Fortune 500 companies, and 75% of new initial public US offerings are incorporated in Delaware. Given these numbers, Delaware has received the reputation as a preferred place to form a company, and some investors may be turned off by non-Delaware companies.
- Legislative Intent. Delaware’s legislature has devoted itself to keep its corporate statutes modern and up-to-date. Delaware understands the importance of clearly written laws that companies can navigate, so the legislature often relies on corporate law specialists for advice. The corporate laws also provide flexibility in structuring and in allocating rights and duties. In addition, a large body of case law can allow for more predictability when the statutes are not clear on a particular issue.
- Judicial Expertise. The Delaware courts and judges have extensive experience in corporate law matters. The Court of Chancery is a special court in Delaware dedicated to rule on corporate law disputes, allowing cases to be resolved in a timely and competent manner by judges who specialize in corporate law. And the Chancery Court does not use juries, which companies often prefer.
- Efficiency. Delaware can be more efficient than other states. Since judges issue written opinions when a case is tried, most Delaware corporations do not litigate disputes because their attorneys examine the published opinions and can predict how a court will rule on a particular issue. Also, filings can be expedited for a fee, so you will not be frustrated when you need a rush formation or a merger immediately closed.
- Privacy. Privacy is increasingly important to people. Delaware does not require director or officer names to be listed in the formation documents, providing a level of anonymity that other states do not provide.
When determining where to form your entity, there are several considerations you should discuss with your counsel, but Delaware is often the default answer.