A lot of business owners and entrepreneurs want to know, “Why do businesses set up shop in Delaware?” The short answer is that Delaware is a great place for businesses to be. There are more than 1.5 million businesses and more than 67% of Fortune 500 companies registered there. Delaware’s flexible corporate laws, specialized court system, and tax breaks are what make it so popular.
We’ll go into more detail about these benefits in this article. We’ll also compare Delaware to other popular states like Nevada and Wyoming, and talk about some important things that business owners and international founders should think about.
Strong, Flexible Corporate Laws
Delaware is known for its well-developed body of corporate law and expert judges. The Delaware General Corporation Law (DGCL) is one of the most advanced and flexible business statutes in the U.S. It is regularly updated to meet modern business needs.
A major advantage is Delaware’s Court of Chancery, a specialized court that hears only corporate disputes. This court uses experienced judges (no juries) who are experts in business law. Because of this specialization, decisions tend to be fast, consistent, and predictable. Over time, the Court of Chancery has developed a vast body of case law that provides clear guidance on corporate issues, reducing legal uncertainty.
Key Legal Advantages:
- Flexible, Upgraded Laws: Delaware law permits an individual to be a director, officer, and shareholder all by themselves, good for small companies and start-ups.
- Jurist Expertise: The Court of Chancery efficiently and promptly resolves business litigation, permitting corporations to avoid long courtroom battles.
- Legal Clarity: An abundance of precedents provides business owners and attorneys with a guidance map for compliance with the company law.
- Management-Friendly: Delaware law grants company managers very extensive authority, allowing innovation and calculated risks to take place.
Tax Benefits of Delaware
Delaware’s tax policies make the state particularly appealing to businesses, especially those not physically operating in the state.
Key Tax Advantages:
- No State Corporate Income Tax on Out-of-State Profits: A Delaware corporation that does not conduct business within the state usually does not pay state corporate income tax.
- No Personal Income Tax for Non-Residents: Shareholders and officers residing outside of Delaware do not pay state income tax on income derived from a Delaware corporation.
- No Sales Tax: Delaware does not charge a state sales tax, which lowers costs for businesses and customers.
- No Inventory or Use Tax: Companies are not taxed on inventory or on using goods in the state.
- Favorable Treatment for Holding Companies: Corporations earning passive income (like royalties or licensing fees) may be eligible for exemptions from corporate tax.
- Reasonable Franchise Tax: While there is a franchise tax, small and mid-size companies often pay modest amounts.
These benefits add up to a tax structure that is especially appealing for companies with national or global operations.
Operational Ease and Privacy
Delaware makes incorporation and ongoing operations convenient and efficient.
Key Operational Benefits:
- Fast Processing: Business filings can often be completed the same day.
- Minimal Requirements: Delaware allows a single person to serve as the sole shareholder, officer, and director.
- No Residency Requirement: You don’t need to be a resident of Delaware or even the U.S. to form a company there.
- Registered Agent System: Every corporation must appoint a registered agent with a physical address in Delaware, but many affordable agent services are available.
- Strong Privacy Protections: The state doesn’t have the requirement to include officer or director names in public incorporation documents, offering a greater level of privacy.
- No Local Business License for Foreign Companies: Companies that don’t operate within the borders of Delaware need not apply for a state business license.
Delaware’s strategy is particularly beneficial for startups, global entrepreneurs, and far-off companies wanting to establish a presence in the U.S.
Investor Appeal and Venture Capital
Many venture capitalists, angel investors, and institutional backers prefer or require companies to incorporate in Delaware.
Why Investors Prefer Delaware:
- Familiarity and Trust: Delaware’s corporate law is well-established and understood, making due diligence easier.
- Stock Flexibility: Delaware law allows multiple classes of stock and customizable shareholder rights, which are essential in startup fundraising.
- Corporate Governance Standards: Clear laws around voting, board structure, and fiduciary duty offer predictability for investors.
- Standard for IPOs: The vast majority of U.S. companies that go public are Delaware corporations.
- Startup Ecosystem Expectations: Incorporating in Delaware is often a precondition for receiving funding from venture capital firms.
For companies planning to scale, raise capital, or go public, Delaware often isn’t just a good option, it’s the default choice.
Comparing Delaware with Nevada and Wyoming
While Delaware is the most popular state for incorporation, Nevada and Wyoming are also considered business-friendly alternatives.
Nevada:
- No State Corporate Income Tax
- No Personal Income Tax
- No Franchise Tax
- Strong Liability Protections
- Requires State Business License
- Higher Filing and Renewal Fees
Nevada offers significant tax advantages but lacks Delaware’s deep case law and specialized court system.
Wyoming:
- No Corporate or Personal Income Tax
- Very Low Fees
- Strong Privacy Protections
- First State to Allow LLCs
- No Franchise Tax
- Limited Legal Precedents
Wyoming is attractive for extremely small businesses that require privacy and minimal expenses. Nevertheless, it lacks the same legal framework or investor attractiveness as Delaware.
Delaware versus Others:
- Legal Predictability: Delaware’s largest strength is in its legal system, which provides a depth of experience not seen elsewhere.
- Cost: Wyoming tends to be the most affordable, with Nevada following. Delaware’s franchise tax may be more expensive, particularly for large or highly capitalized firms.
- Complexity vs. Simplicity: Delaware would be most appropriate for growth-oriented and financed companies. Wyoming could suit low-budget, local enterprises.
Potential Drawbacks of Incorporating in Delaware
Even with all its advantages, Delaware will not be the ideal choice for all companies.
Common Drawbacks:
- Annual Franchise Tax: Every corporation has to pay this tax, which is quite steep for large companies.
- Double Registration: If you operate in another state, you must also register there and comply with local laws.
- Higher Costs: Incorporating in Delaware involves additional fees and may require hiring a registered agent.
- Travel for Legal Matters: Legal disputes may need to be resolved in Delaware, requiring travel and specialized legal representation.
- Most small businesses will never take advantage of Delaware’s advanced legal features. Incorporation in the home state may be easier and cheaper for them, as local incorporation often is.
Local-only or sole-proprietor businesses may even find that incorporation in their home state is less expensive and more streamlined.
Conclusion
Businesses like Delaware because it has a strong mix of clear laws, flexible taxes, easy operations, and appeal to investors. Delaware is the best place for businesses of all sizes, from new tech startups to world-famous companies. This is because its courts are experts in corporate issues, its corporate laws are up-to-date, and its tax systems are appealing.
That being said, Delaware isn’t right for everyone. Small businesses that don’t need money from investors or a lot of legal work may be better off in states like Wyoming or even in their own state.
In the end, your goals will determine what you do. Delaware is the best place to raise money, grow quickly, or go public. But if you want to keep costs low and things simple, other states might be better for you.
