Newsflash: Business School Professors Wrong, Delaware is Not Always the Answer
2012/08/27 1 Comment
I’m working on incorporating a start-up and I discovered something very interesting, Delaware is NOT necessarily the best place for initial incorporation of your start-up. If you are profitable, public corporation, Delaware is almost a no brainer. However, there is no tax liability associated with moving to Delaware and most start-ups are not profitable or public.
Being incorporated in Delaware adds complexity and several fees and expenses that you might not incur when incorporating in your home state. Especially if your state follows the model corporation act, you might consider incorporating there. If you are not profitable, the corporate income tax rate of your state is irrelevant, you save a bunch of fees, the complexity of having registered agents, and having to qualify as a foreign corporation in your state.
The advantages of being in Delaware are in legal provisions that only apply once you have many classes of stock, the taxes on profits once you have them, and the power of officers and directors, particularly once the corporation is public. None of these matter if you are pre-seed stage and may not matter at all until an IPO. If the VCs demand that you be a Delaware corporation, okay, no big deal it can get done in less time than it will take them to finish their paperwork, but in the meantime, you’ve saved some money and most importantly some headaches of dealing with a state that is constantly trying to put its hand in your pocket.
I had been told by several entrepreneurship professors that Delaware is the only choice for incorporation of a start-up. I was surprised to learn that this is not necessarily the case. Others seem to think so as well. Pass it on and consult with your counsel to make a decision that is right for your circumstances.