Why Delaware is the Place to Incorporate Your Tech Startup

Give your startup the best chance of success

If you’re serious about giving your tech company the best chance of success, you may want to know why a Delaware C Corp gives you a solid foundation for your startup.

With so many states to choose from, it seems odd that one state stands out from the rest as the best choice to incorporate your company, but as you will see, there are very good reasons for this. You may wonder if it really matters. What’s the difference? A company is a company, right? Not quite.

What is Incorporation?

Why incorporate at all? Why not just operate under your name from your garage?

LegalZoom says that “the word “incorporated” means that a business has formed a corporation in one of the 50 states and is, therefore, a legal entity separate from its owners.”

A corporation is a legal entity separate from its owners. The owner’s assets cannot be touched even if the company goes broke, and many startups do go broke. You definitely need to separate your assets from the assets of your company! Be aware that you have to have separate personal and business bank accounts, as well as separate expense records, or else you will lose liability protection. See the LegalZoom article for more details.

Most importantly, incorporating in a certain state means that the company must adhere to the laws of that state. The reason that a Delaware company is seen as so attractive is because of the laws of the state of Delaware. What is so attractive about Delaware law?

Delaware Corporate Statutes

This quote from this Stripe article sums up the advantage of Delaware corporate statutes — “The state of Delaware has a highly developed body of law governing corporations which can lead to a high degree of predictability in the event of a legal dispute.” In other words, there is no ambiguity in the laws governing your company. Delaware even has a specialized court (the Court of Chancery) that deals exclusively with corporate law matters, as noted in this article.

Other provisions of Delaware Corporate Statutes:

• Allows for voting by electronic proxy and virtual attendance at stockholder meetings.
• Delaware corporations can have only one director.
• Allows electronic signatures on documents.
• As per the above article, “Filings, such as an amendment to a company’s certificate of incorporation in connection with a venture financing, can be made electronically and are generally accepted upon submission within a day.”
• Delaware courts allow more flexibility by deferring to the good faith and judgment of company Directors.
• Delaware allows corporations to indemnify their directors for losses incurred due to legal action.

I’m sure you will agree that the above provisions are very forward-looking, and make it easy for owners to operate their businesses remotely.

Given the above business-friendly provisions then, it’s no wonder that investors favor Delaware businesses, which leads us to the next section.

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Investors Often Insist on a Delaware C Corporation

If you’re absolutely certain that you will bootstrap (self-fund) your company forever, you can skip this section. If you run out of money and need funding, however, you will be sorry you did.

Y Combinator advises, “If your company is unincorporated when it is accepted into YC, we’ll help you get it incorporated in Delaware using standard formation documents.” If you are incorporated in another state, you may have to reincorporate, which can be quite a legal minefield.

Here is a Youtube video (below) where Y Combinator explains why they prefer Delaware C Corporations.

As this article explains, if an investor insists that you reincorporate in Delaware, “the company will incur additional legal expenses in connection with the reincorporation. If a company ultimately undertakes an initial public offering of its stock, the underwriters will usually require that the entity be incorporated in Delaware.”

How to Incorporate

The Y Combinator video above recommends Clerky to incorporate, but there are also other options. Let’s start with the easiest first.

Stripe Atlas By far the easiest, most pain-free way to incorporate is using Stripe Atlas (just my opinion). See this page where you will be shown how “No matter what country you’re based in, you can use Atlas to easily incorporate a U.S. company.” The total price is $500. You can bolt on lawyer consultation if you want.

In addition to the price of $500, there are also key ongoing costs after the first year:

• Delaware registered agent — $100 per year (renewed automatically)
• Corporate tax preparation — packages start at $250 per year
• Delaware tax filing — preparation is free, Delaware fee starts at $225
• Bank account — apply via Stripe partners or bring your own (fees, eligibility may vary)

Stripe will handle all the documentation, sending you legal documents to sign electronically after you have chosen your company name, share setup, etc. They will even apply for an EIN (Employer Identification Number) for you. You basically just have to sign documents.

After you incorporate, Stripe will assist you to open a bank account with one of their three partner banks, Mercury, Azlo, or Silicon Valley Bank. You can also “… use the Stripe Atlas tool to issue stock to founders in the Stripe Dashboard — for free — using legal templates that are standard among many tech startups.”

Stripe will also give you an account that you can use to accept online payments in 100+ currencies and get paid into your bank account. You can also manage your company in the Stripe dashboard.

Be aware that “C Corporations active in Delaware any time before December 31st owe at least the minimum Delaware Franchise Tax for that year.” Therefore, “companies planning to form near the end of a year might want to consider instead forming in January of the following year.”

Subscribe at the bottom of this Stripe page to get “a free one-month course on starting your business written by the experts at Stripe Atlas.” Also, note that Stripe specializes in online tech startups. They know what you need.

Use Services like Clerky or Hire an Attorney This is pretty straightforward to explain. Services like UpCounsel, LegalZoom, ZenBusiness, etc., will help you for a fee of about $200 — $5000, depending on what you want.

I’m not recommending any of these services, I’m just giving you the info. They will guide you through the company incorporation, but when all is done, you won’t have a payment service like Stripe for your startup, and I’m not sure of their service level for non-US founders. You will have to apply for a payment service separately if you need one.

Do it Yourself Aye yai yai! Don’t do this! Rather use your mental powers to create your product. This is a minefield, and I’m not going to pretend I know how to do it.

In Conclusion

Delaware Corporate Statutes have been honed to be as business-friendly as possible. You will be hard-pressed to find a state more business-friendly, which is why investors prefer to deal with Delaware incorporated companies.

Even if you plan on bootstrapping your company forever, the ease of doing business in Delaware should make you think twice about any other state. Besides, you may run out of funds, or change your mind and decide to sell your company, and then you will have to deal with a legal minefield when the investor insists on you reincorporating.

Also, think carefully about the service you use to incorporate. Stripe seems to be the most user-friendly, but you make up your mind when you have done some research.

Overall, a Delaware incorporated company signals that you’ve done your homework, you’re serious about growing your startup, are open for investment, and you know what you’re doing.

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All the best!

Disclaimer: The content in this article is not legal advice. It is provided for information only.