Why does everyone incorporate in Delaware?

Friday, October 19, 2007

Fred Greguras, Fenwick & West, http://www.fenwick.com/

I still see some entrepreneurs use California corporations because they want to keep their costs as low as possible. Delaware incorporation advantages are venture capitalist preference, ease of dealing with regulatory authorities, flexibility in the law (such as the number of board members) and more helpful precedent on corporate law. Disadvantages are the corporation being taxed by and subject to two states regulatory requirements.

You can’t avoid California taxes if the corporation is operating in California. California advantages are lower cost and being subject to only one state’s regulatory requirements, if the corporation is operating here. One major disadvantage of using California is the difficulty of dealing with regulatory authorities on corporate filings in a financing or other situation when articles of incorporation need to be amended. If a business has been incorporated in California, the VCs will often want it to be reincorporated in Delaware as part of a round of financing.

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