Incorporating in Delaware is extremely popular for startups these days, largely due to the abundance of information available on Delaware’s favorable tax and corporate law. However, contrary to common belief, while incorporating in Delaware is the right decision for a small minority of startups, for the majority of new businesses, it’s a mistake.
For a small fraction of startups in the US, incorporating in Delaware makes sense. If you intend for the principle office of your business to be physically located in Delaware, you should incorporate in Delaware. If you intend to seek venture capital financing early on – and (truly) have a realistic prospect of obtaining venture capital funding – incorporating in Delaware may be right for you.
If neither of these situations apply to you, you are better off incorporating in the state where your business is located. This article will set forth several reasons why you should not incorporate your new company in Delaware, and instead incorporate in the state where your business is physically located – your “home state”.
1. You’re not initially seeking venture capital funding. It’s true that venture capital firms will require companies to be structured as a Delaware corporation as a condition to funding the company. Venture capital firms are familiar with well-established corporate law in Delaware, and investors receive favorable tax treatment under Delaware law.
However, unless you are in a very small minority of tech startup companies, you are not realistically going to seek – or receive – venture capital funding. According to an article in Forbes.com, of the 600,000 new businesses started in the US every year, about 300 are funded by venture capital, meaning 99.95% of new businesses do not receive venture capital funding at startup.
2. Your business is located in another state. If your headquarters are located in a different state, incorporating in Delaware makes little sense. Let’s say you incorporate in Delaware but have your main office in Oregon. In this case, you’ll need to pay the annual franchise tax in Delaware (Oregon doesn’t have one). You’ll also need to follow annual reporting requirements in both states and, while filing annual reports isn’t rocket science, there’s no reason to double the work and expenses unnecessarily. Under this hypothetical, you’ll also need a registered agent in Oregon and Delaware, and, if you don’t have a physical presence in Delaware, that means you will be paying someone to serve as a registered agent in Delaware.
3. Web-based businesses still have a home state. With increasing regularity in the COVID-19 environment, companies are moving to an entirely web-based platform. So, you be thinking, if I’m entirely virtual with no physical presence in any one state, I can choose any state as my home state, right? Clever, but no.
Even if you have no physical storefront and operate an entirely virtual business, you and your computer are still physically located in a particular state – and that’s the home state for your business. Even if your business is entirely online, you’ll need to register with that home state, either by incorporating there from the outset, or by registering as a foreign company authorized to transact business in that home state.
If your business is physically located in Delaware, incorporate in Delaware. If you’re in the small minority of startups with a realistic prospect of securing venture capital funding, well done. Go ahead and incorporate in Delaware. For the remaining 99% of startups, incorporating in your home state (and if your reading this article, likely Oregon) is the right decision.
If you’re thinking about starting a business in or around Portland, Oregon or are interested in learning more about choosing the right business structure, contact us.