Why Incorporate in Delaware? Pros and Cons for Startups

What state is home to over two-thirds of Fortune 500 companies, half of US public companies, and the beachside amusement park Funland? The answer, of course, is Delaware.

While Delaware’s corporate law is famously friendly to large public corporations, banks, and credit card companies, incorporating in Delaware can also be a good choice for small or early-stage businesses—particularly those that plan to seek investor funding.

Most startups choose to incorporate in Delaware for good reason. In 2021, over 90% of all initial public offerings in the US were registered in the state. Delaware established itself as a corporation-friendly landmark in 1899 by creating lenient policies to draw business owners into its borders—and that trend continues today.

Once you understand the advantages and disadvantages, it’s easy to see why many companies—from Fortune 500 giants to early-stage startups—choose Delaware as the most popular state for incorporation.

Key Takeaways

Delaware’s Court of Chancery and established corporate case law give many businesses legal predictability that other states can’t match.
Startups seeking venture capital often incorporate in Delaware because many investors prefer it—making fundraising smoother.
Delaware isn’t always the best choice for incorporation; franchise tax fees, registered agent costs, and foreign qualification requirements can outweigh the benefits for smaller companies.

What Are the Advantages of Incorporating in Delaware?

Incorporating your business in Delaware is fast, relatively affordable, and can confer a set of legal and tax advantages for all types of business entities. Incorporation services like Stripe Atlas can even set up a Delaware business for you in just a few days.

Some entity types gain additional advantages. LLCs and corporations can benefit from investor preference for businesses incorporated in the state, while C-corps can take advantage of flexible corporate statutes regarding stock distribution and transfer.

Here’s an overview of each major benefit of choosing Delaware to incorporate your business.

Liability Protection

Delaware provides strong limited liability protections, and veil‑piercing is relatively rare, but courts can disregard the entity in cases of fraud or similar abuse of the corporate form. In fact, the Institute for Legal Reform’s State Liability Systems Ranking Study regularly finds that attorneys and executives with corporate litigation experience rank Delaware’s liability protection as the best offered by any state in the US.

Corporation Court and Legal System

The Delaware Court of Chancery is a non‑jury court of equity that is best known for handling corporate and business disputes involving Delaware entities. Decisions are made by judges who specialize in corporate law, making Chancery Court proceedings efficient and providing more predictability than courts in other states handling similar cases.

Because so many corporations are incorporated in Delaware, corporate attorneys outside of the state also tend to be familiar with Delaware general corporation law. This familiarity with established corporate case law can further increase the efficiency of any legal proceedings and reduce uncertainty for corporations facing disputes.

Investor Preference

Delaware corporation laws are more flexible than those in most other states. As an example, Delaware C-corps can continuously issue more shares of stock, issue multiple classes of stock, distribute stock options to employees, and more easily transfer shares of stock than corporations formed elsewhere.

For these reasons, venture capitalists, investment bankers, and angel investors prefer Delaware corporations. Many investors consider Delaware incorporation safer and more attractive for watching their investments grow.

Efficiency

Delaware prides itself on offering a quick and simple business setup, including same-day processing of business filings through the Delaware Division of Corporations. Delaware also allows one person to hold multiple corporate roles such as officer, director, and shareholder.

Tax Benefits

Delaware’s tax laws are generous. The state doesn’t have state sales tax or investment income taxes, and Delaware companies don’t need to pay state corporate income tax unless they also do business there. Delaware also recognizes S corporations as pass-through entities, meaning the state doesn’t tax S-corps at the entity level. This tax structure means many businesses can minimize corporate taxes significantly.

Every Delaware corporation owes an annual franchise tax (and LLCs owe an annual LLC tax), and depending on where and how they do business, they may owe other Delaware or out‑of‑state taxes as well.

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Disadvantages of Incorporating in Delaware

Although there are many benefits to incorporating in Delaware, it’s not always the best choice for all businesses. Here’s a rundown of the main disadvantages.

Cost and Additional Fees

All Delaware corporations owe a franchise tax, and Delaware LLCs, LPs, and similar entities owe a flat annual franchise tax or LLC tax, regardless of whether they do business in the state. Unless you have a physical address in Delaware, you’ll also need to obtain a registered agent in the state to form your business there, which carries additional fees.

If you plan to do business in states other than Delaware, you’ll also need to foreign qualify in those states and pay associated fees. Depending on your business activities, it may be more cost-effective to form your business in your headquartered state or in a state where you plan to do business.

Reporting Requirements

If you incorporate in Delaware, you’ll be required to file an annual franchise tax report in Delaware, an annual report in your headquartered state, and potentially also filings in other states where you conduct business. Many businesses underestimate this burden. Duplicate reporting obligations and varying licensing requirements require companies to invest more time and money to stay compliant.

Minimal Tax Savings for Some Businesses

Incorporating in Delaware can confer massive tax advantages—or not. It depends on your business entity type, where you earn income, and whether your company is large enough to invest in the accounting and business strategy methods required to take advantage of the state’s corporate income tax advantages.

If you don’t do any business in Delaware or operate an entity not otherwise subject to corporate income tax (such as an LLC or an S-corp), Delaware’s corporate income tax policies won’t benefit you—and you’ll still owe franchise tax there.

May Not Benefit Small Businesses

Small businesses don’t always need to be incorporated in Delaware to enjoy favorable tax laws. Many states cater to the entrepreneurial spirit of business owners—Nevada and Wyoming being two popular examples.

Delaware’s corporate laws and protections are primarily designed for larger or more ambitious corporations that intend to expand nationally or globally. Delaware residents running local businesses, for instance, may find better value incorporating in their home state. If your corporate ambitions are more modest and you live in a state with incentives for corporations, there’s nothing wrong with staying local.

Delaware vs. Nevada and Wyoming: Comparing Popular States for Your Company

Delaware isn’t the only business-friendly state. Nevada and Wyoming both market themselves as alternatives with their own advantages.

Nevada has no state corporate income tax and no traditional franchise tax, but there are state business license fees and annual list fees. Nevada law also requires corporations to list officers and directors on their annual list filings, which are public, but some owners use nominee officers to reduce their own visibility. Further, the state lacks Delaware’s deep body of corporate case law, which can create more uncertainty in corporate disputes.

Wyoming offers low fees, no state income tax, and strong asset protection laws. It’s particularly popular for a Delaware LLC alternative. Wyoming also has a business-friendly court system, though it doesn’t match Delaware’s specialized Court of Chancery or decades of established precedent.

For many businesses not planning to raise outside funding, Wyoming or Nevada can be more cost-effective than Delaware. The tradeoff is less legal predictability and potentially less familiarity among investors and attorneys. Startups seeking venture capital typically still choose Delaware.

How to Decide if Incorporating in Delaware Is Right for Your Company

Whether or not you should incorporate in Delaware depends on your business structure, operations, size, and goals. Here are a few things to consider when making the choice.

Do you conduct business in Delaware? If you conduct business in Delaware, incorporating in the state can eliminate one of your potential foreign qualification needs. You’ll also benefit from the state’s lack of state corporate income tax.
What are your liability concerns? Incorporating in Delaware isn’t the only way to obtain liability protection—incorporating in any state can protect your personal assets, and liability insurance can offer protections for your business. That said, Delaware’s business-friendly policies (and business-only court) are generally considered to provide stronger liability shields than other states.
What is your entity type? Some of the benefits of incorporating in Delaware apply to all business types, such as liability protection, legal process in the Court of Chancery, and quick registration. Investor preference, flexible regulations around stock distribution, and the lack of state corporate income taxes are mainly beneficial to corporations.
Do you plan to seek investor funding? If you plan to seek investor funding, it’s a good idea to make your company as attractive to potential investors as possible. Many investors favor Delaware corporations in investment decisions.
What are your revenue goals? Large corporations tend to have larger accounting budgets—if your annual revenue is in the billions, it can be cost-effective to invest in accounting strategies that allow you to declare some income earned in other states in Delaware. If your annual revenue isn’t yet in the billions—but you have ambitions to get there—you might incorporate in Delaware for the flexibility to adopt these strategies later.

If your business is incorporated in Delaware, Mosey’s compliance platform can help you navigate legal, tax, HR, and insurance requirements across all states you do business in. Mosey supports corporations to LLCs with large teams and provides guided steps for new founders and entrepreneurs to help navigate business compliance needs after incorporation, including foreign qualification in your headquartered state, getting your founding team on payroll, and managing ongoing compliance.

How To Incorporate in Delaware

Delaware law is designed to make it as easy as possible for businesses to incorporate within the state. The business formation process is simple, but there are special considerations you may need to make if your primary physical presence is outside Delaware.

Name Your Business

Choose a unique name for your business that abides by Delaware’s naming laws. Your limited liability company (LLC) must contain “LLC” within its name. Your name must also be checked with the Secretary of State to ensure it isn’t too similar to a name that’s already registered.

Assign Roles and Positions

Delaware LLCs must have at least one member (and optionally one or more managers), and corporations must have at least one director and one or more stockholders. LLCs do not need to list owners or managers on the Certificate of Formation, and corporations do not list directors or officers on the Certificate of Incorporation, though that information appears on the annual franchise tax report. Also, there is no Delaware residency requirement for owners, directors, or managers.

Appoint a Registered Agent

If you don’t live in Delaware or maintain a physical presence there, Delaware law requires you to appoint a registered agent or agent service to receive your mail and accept legal process service on your behalf. You must list your agent and their contact information on your official paperwork.

File Your Incorporation Paperwork

After you’ve completed your paperwork, you must file it with the Delaware Department of State and pay any necessary filing fees.

Review Tax, License, and Permit Requirements

Depending on the nature of your business, you may need a business license. All businesses must remain compliant with franchise tax and reporting requirements, which are different for corporations and LLCs.

Determine Your Need for Foreign Qualification

If your business is incorporated in Delaware but intends to conduct business outside of the state, you may need to complete the foreign qualification process for the states where you intend to operate.

The foreign qualification process is typically the same as the original incorporation process but on a smaller scale. States need verification that you are a registered and valid business entity somewhere in the country. You may need to obtain special certificates from the state of Delaware or share copies of your incorporation paperwork.

Some states may also impose additional requirements that weren’t necessary when you incorporated in Delaware. You may need to complete state-specific tax or reporting requirements or obtain additional licenses specified by the state or municipality where you intend to conduct business.

Mosey’s Services for Delaware Companies

Mosey’s compliance management platform is designed to help businesses comply with state business compliance rules. We’ll monitor compliance requirements for your Delaware corporation and keep you on track.

If you’re incorporated in Delaware but out of state, Mosey can act as your Delaware registered agent. You need a registered agent service to accept service of process or official government correspondence. Receive and and manage your corporate mail directly in Mosey so you can stay informed no matter where you are.

Schedule a demo with Mosey to learn how we can simplify the process of running your Delaware corporation.

FAQ: Why Incorporate in Delaware?

Why are so many corporations based in Delaware?

So many corporations are based in Delaware because of its business-friendly legal system, specialized Court of Chancery, and decades of established corporate case law. These factors provide legal predictability that reduces risk for large companies and their investors.

Is it better to set up an LLC or a corporation in Delaware?

Whether to set up an LLC or corporation in Delaware depends on your funding plans and tax situation. Corporations work better for startups seeking venture capital, while LLCs offer simpler taxation and fewer formalities for smaller businesses.

Do Delaware corporations pay income tax?

Delaware corporations do not pay state corporate income tax unless they conduct business within Delaware. However, all Delaware corporations must pay an annual franchise tax based on their share structure.

Why do startups incorporate in Delaware?

Startups incorporate in Delaware primarily because many investors prefer it. Delaware’s flexible stock rules, established corporate case law, and specialized business courts make fundraising and governance smoother.

Why incorporate in Delaware vs. California?

Incorporating in Delaware vs. California often saves money because California imposes an $800 minimum franchise tax plus higher fees for most businesses. Delaware also offers more established corporate case law and a specialized court system for disputes.

Why incorporate in Nevada vs. Delaware?

Incorporating in Nevada vs. Delaware comes down to priorities—Nevada offers stronger privacy protections and no corporate income tax, though it does impose state business license and annual list fees. Delaware also provides more legal predictability and stronger investor preference. Startups seeking funding typically choose Delaware.

Why incorporate in Delaware vs. New York?

Incorporating in Delaware vs. New York usually makes sense because New York has higher fees, more demanding reporting requirements, and a less specialized court system for corporate disputes. Delaware’s streamlined processes and established business law give it an edge for most companies.

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