Why so many startups choose to incorporate in Delaware
TL;DR - Why startups incorporate in Delaware
- Delaware offers predictable corporate law and a specialized Chancery Court, which investors prefer.
- Incorporating in Delaware makes it easier to structure venture financing and preferred equity.
- Trade-offs: franchise taxes, annual reporting, and potential foreign-qualification fees if you operate elsewhere.
- Not always best for small, local businesses; consider your fundraising plans and operational footprint.
Delaware is the most business-friendly state in the U.S. Over one million businesses have filed for incorporation in the state since its inception, including companies like Alphabet and Mercury.
In this article, we explore why Delaware is the best state for startups to incorporate in, from the safety its legal system can provide to your startup to the benefits of its tax structure.
What is a business-friendly state?
Business-friendly states like Delaware, Nevada, and Wyoming offer unique advantages for registered businesses, including tax breaks, legislation, and experienced court operations. We’ve listed a few advantages that business-friendly states offer below.
- Well-equipped courts: Court proceedings must happen in your state of registry rather than the state your company operates in, and choosing a business-friendly state can help keep legal headaches at bay. Business-friendly states tend to have better-equipped courts with experienced judges and jurists who understand the nuances of corporate law.
- For example, limited liability protects your personal assets from being seized if there's a business liability that your business can’t pay for, like a lawsuit. More experienced judges in business-friendly states can help negotiate the edge cases of limited liability and ensure the safety of your business. Less business-friendly states have weaker limited liability—Maryland, for example, has risky state-only (no federal) limited liability protection.
- Business-friendly legislature: Some states are more legally restrictive than others on business operations—for example, Maryland has risky interest accruement on charging orders, which means your company might pay interest on owed funds to creditors. Business-friendly states help your business grow with regulations that support the business economy more robustly, including beneficial tax rates. (We’ll explore Delaware’s specific tax benefits further down.)
- Lower formation and filing fees: States that encourage new business formation tend to have lower formation fees, which can save you from spending upfront capital. Additionally, annual filing fees are recurring, so choosing a state with a lower annual filing fee is a wise move to save cash in the long run. The cost to incorporate in Delaware is only $89, though this initial filing fee can increase based on stock. Compare that with Alabama, which will cost you $200 just to exist as a business.
Benefits of incorporating in Delaware
In 2020 alone, nearly 250,000 new businesses incorporated in Delaware. The state’s business-friendliness is considered the most complete of all the U.S. states, from its initial filing and annual fees to its continual tax benefits. Below, we've listed some of Delaware’s key business-friendly characteristics.
Attractive to investors
Delaware corporations are highly attractive to investors because of the legal security the state offers. The legal ecosystem in Delaware is well-established and the state has centuries of experience with business cases.
This experience makes legal outcomes much more predictable, which also makes it more likely that your Delaware startup could get funding opportunities from angels, venture capitalists, and investment firms.
Popular with corporate services
Delaware is the most well-known state for company formation. Over one million companies have incorporated in Delaware since the state’s inception as well as 66% of Fortune 500 companies, including Alphabet and Mercury. This popularity attracts more lawyers, which in turn creates a better legal system for businesses.
Plus, due to its popularity, Delaware offers the privilege of choice. The state has several options for your startup for legal representation, legal education, accessibility to obligation fulfillment services, and more.
Strong privacy protections for founders
There are a number of reasons your startup would want greater anonymity for its founders or itself, from safeguarding basic proprietary information to working in divisive industries. In Delaware, you can run a corporation as a single individual (some other states require at least three people to incorporate) and your director names don’t need to be listed on your formation documents.
This privacy can help you and your founders maintain a certain level of discretion. Keeping your cards close to the chest is much easier in a state that systemically and systematically respects your privacy.
Business-friendly and efficient legal system
Delaware has been business-friendly for a long time. As a result, there are well-established corporate statutes that protect companies in a wide variety of legal circumstances, including the Court of Chancery, established in 1792, which exists solely to handle corporate legal disputes. With a centuries-long history of case rulings by experienced judges, there is great precedence for any legal tangles your startup experiences.
Plus, with so much data, law professionals are able to quickly predict outcomes on common case filings. Even if you happen to have a rare situation, it has most likely been addressed at some point in the centuries of cases seen by the courts. Your counsel will be well-equipped to represent you effectively and efficiently (or otherwise determine if it will be better for you to cut your losses).
Tax advantages
Delaware has no corporate income tax, even for businesses that are operating outside of the state. Consider that some states have combined corporate tax rates that exceed 27%, including franchise taxes, excise taxes, and more. With Delaware's 0% tax rate, your company will save money on taxes each quarter and you'll have more capital in hand.
The tax price is right
Incorporating in Delaware is most beneficial for your long-term savings, but the upfront costs aren’t terrible either. Initial filing fees are a minimum of $89, which is slightly higher than the cheapest states, with Arkansas, Colorado, Hawaii, Iowa, Michigan, and Missouri tied for the lowest initial fees at $50 each.
The long-term value of incorporating in Delaware comes from the state’s legislature around corporate taxation. There are no minimum corporate income tax payments. The state does not have typical state taxes including inventory, unitary, use, inheritance, capital share, stock transfer, or value-added taxes (VATs). And with a corporate income tax rate of 0% and a federal tax rate of only 8.7%, the payoff over time is sizable. Compare the 8.7% combined federal tax rate in Delaware with other states, like Vermont’s 27.7%—among the top ten highest combined corporate tax rates in the country—and the state’s reputation as a startup haven makes sense.
Delaware vs. other states
While Delaware is the go-to choice for most venture-backed startups, it’s not the only option. Some founders compare costs or local rules before deciding where to incorporate. Here’s how Delaware stacks up against a few other popular states:
Feature | Delaware | Wyoming | Nevada | California |
|---|---|---|---|---|
Investor preference | Widely considered the gold standard; nearly all VCs expect Delaware C-corps. | Less common for venture funding; usually not VC-backed. | Rare among VC-backed startups; more used for privacy reasons. | Many companies start here but often re-incorporate in Delaware before raising VC. |
Legal system | Court of Chancery offers predictable rulings and extensive case law. | Simple business laws, but limited precedent for startups. | No specialized court system for corporations. | Strong case law, but slower courts and complex compliance. |
Costs | No state corporate income tax for companies operating outside DE. | No corporate or personal income tax. | No corporate income tax, but annual business license tax. | 8.84% state corporate income tax. |
Privacy | Moderate disclosure requirements; directors must be listed. | Strong privacy protections, including anonymous LLCs. | Strong privacy protections; owners not publicly listed. | Limited privacy; owner information is public. |
Best for | Startups planning to raise VC or scale nationally/internationally. | Small online businesses, asset protection, or founders prioritizing cost/privacy. | Entrepreneurs seeking tax and privacy advantages without VC goals. | California-based startups not planning to raise VC. |
Bottom line: If you plan to raise outside funding, Delaware is still the default. Alternatives like Wyoming or Nevada may be attractive for solo founders or small businesses focused on cost or privacy, while California incorporation usually only makes sense if your business will remain local.
Looking for help setting up your business?
Mercury’s Business Formation tools make it simple to incorporate, handle registered agent service, and manage compliance.
Disadvantages of incorporating in Delaware
Despite its popularity, Delaware isn’t perfect for every business. Founders should weigh the following drawbacks before making a decision:
- Higher franchise taxes and fees
Delaware’s franchise tax can range from just a few hundred dollars a year to over $200,000 for large companies, depending on capitalization. Even early-stage startups may find the minimum annual costs higher than states like Wyoming or Nevada, which charge as little as $50–$100. - Dual compliance burden
If your company is physically operating in another state, you’ll need to register as a “foreign corporation” there. That means paying annual fees and filing reports in two states—Delaware and your home state—effectively doubling administrative work. - Less relevant for non–VC-backed companies
The advantages of Delaware (case law, Court of Chancery, investor familiarity) are most useful if you plan to raise venture capital. For small businesses or those planning to stay local, these benefits may never come into play, making Delaware’s higher costs hard to justify. - Limited local presence
Unless you live in Delaware, you’ll need a registered agent in the state. While inexpensive, this adds another layer of distance between the company and its place of incorporation, compared to setting up where you’re actually based.
Bottom line: Delaware is optimized for companies that expect to raise capital and scale. If you’re bootstrapping, staying small, or only operating locally, its costs and compliance requirements may outweigh the benefits.
FAQ: Incorporating in Delaware
Do Delaware corporations pay state income tax?
Yes, Delaware corporations must pay Delaware corporate income tax if they earn income within the state. However, if your company only does business outside Delaware, you generally won’t pay Delaware corporate income tax on that revenue.
Is Delaware good for LLCs, or just corporations?
Delaware is popular for both corporations and LLCs. The state’s LLC Act is one of the most flexible in the U.S., making it attractive for small teams and investors alike. That said, local small businesses may not benefit from the added complexity compared to forming an LLC in their home state.
What is the Delaware franchise tax, and how much is it?
Delaware charges an annual franchise tax on corporations, which can range from as little as $400 to more than $200,000 depending on company size and capitalization. LLCs and partnerships pay a flat annual fee of $300.
Do I need to register my Delaware company in my home state?
Yes, if you’re physically operating in another state (e.g., you have an office, employees, or customers there), you’ll need to register as a “foreign entity” in that state and pay its local fees.
Why do investors prefer Delaware companies?
Most U.S. venture capitalists and angel investors are accustomed to Delaware’s legal framework and standardized documents. Incorporating in Delaware helps avoid delays in due diligence and can streamline fundraising.
