Delaware is kind of an odd place. Although it has less than a million people and its largest city’s principal claim to fame is being a suburb of Philadelphia, it is also home to the vast majority of the country’s largest companies. Why? Because of the strange history of corporate law, and an old rivalry with New Jersey. But none of those historical details matter for the founder of a startup. What matters are the practical reasons (i.e., money saving reasons!) why a founder should consider incorporating in Delaware instead of in their home state.
When you incorporate a business, you are generally required to have a person or organization resident in the state in which the business operates that can accept official correspondence on your behalf – also called, an agent for service of process. I don’t know this for a fact, but it has been my experience that most states will let a person act as their own agent for service of process if they live in the state in which their business operates.
So let’s say you live in the Commonwealth of Virginia and you want to start a new venture. By incorporating in Virginia, you will be able to save yourself a few hundred dollars a year in filing fees and agent fees by acting as your own agent. If you were to incorporate in Delaware, then you would need to pay a third party to act as your agent in Delaware and you would need to file to do business as a “foreign” corporation in Virginia – more fees and more paperwork. So then why should the average startup even consider incorporating in Delaware?
Well, for one, if you have thoughts of ever looking for funding, then being a Delaware company can have real advantages. The fact is that people who invest in companies tend to prefer Delaware companies (or at least their lawyers tell them they should) because of the breadth and predictability of Delaware corporate law. As a result, most VC deals are governed by Delaware law. When you go out to seek funding, if you are already a Delaware company then you will avoid the likely costs of having to “move” states. It’s also likely that you will incur less legal fees since the paperwork used for investments in Delaware companies is very standard and will take less time for a law firm to prepare and negotiate.
Delaware. It’s not just for the Fortune 500 anymore!
