Company founders frequently ask their California business attorneys whether they should incorporate in California or Delaware. The answer in the view of DPA Law Group in San Jose is this depends on the founder’s objectives and goals for his or her new company.
As a California based company (meaning one with its primary place of business in California or one with its corporate “nerve center” here—the place where the corporation’s high level officers will direct the corporation’s activities) choosing Delaware is not likely to save on taxes or organizational costs. The opposite is probably true: a so-called “foreign” (Delaware) corporation based in California will pay, at a minimum, franchise taxes in both Delaware and in California, and pay to have an agent for service of process in Delaware. So why Delaware?
If a founder plans to bootstrap the company with his or her own money and grow its operations from revenue rather than bringing in outside investors, there may be no tangible benefit to organizing in Delaware. If, however, one’s goal is to send a message to the angel investment community and venture capitalists that you are, or intend to be, a national company serious about receiving third-party investment, then Delaware is likely your preferred choice. These are the primary reasons:
- U.S. angel investors and venture capital funds tend to prefer to invest in companies incorporated as a sub-Chapter “C” corporation in Delaware versus any other state or any other type of corporate entity (i.e. LLC’s, or LLP’s.) If the founder intends to receive investments from these type of third-party investors, he or she will probably want to incorporate as a C corporation in Delaware.
- Many investment bankers insist on a U.S. company being incorporated in Delaware before they attempt to take same public. So if an IPO is a possible exit strategy, one may wish to incorporate in Delaware rather than having to later convert to a Delaware corporation.
- Delaware corporate statutes provide a great deal of flexibility in the organization of a corporation and the rights and duties of board members relative to stockholders. The principle of freedom to contract to adjust relationships is considered stronger under Delaware corporate law than under California corporate law.
- Delaware maintains separate courts – the Delaware Court of Chancery – which specialize in corporate matters. The Court of Chancery has expertise and a sizable body of case law for resolving corporate disputes. This established Delaware jurisprudence suggests enhanced predictability in terms of the likely judicial result in the event of a corporate dispute requiring litigation.
- Many corporate attorneys in the U.S. practicing corporate transactional law are familiar with the Delaware general corporation law—even if they are, for instance, California lawyers as we are at DPA Law Group. This means that absent a merger or similar transaction, there is generally no need to consult a Delaware lawyer in addition to your local California corporate attorney to incorporate in and operate as a Delaware corporation.
Ultimately a California based company incorporating in Delaware is a matter of its founders wanting to signal the investment community that the company understands the preferences in the marketplace and is serious about attracting sophisticated third-party investors.
By Andrew (Drew) Piunti, firstname.lastname@example.org, ©2016. DPL Law Group, 1100 Lincoln Ave. #381, San Jose, CA 95125