You may have heard that many business entities, including most large corporations, are formed in Delaware. Why is that? Delaware’s popularity is the result of a few factors, the first of which is history. Delaware was one of the early states to permit formation of corporations without getting a charter from the state legislature, and this ease of formation was attractive for early businesses. Back at this time Delaware also had a favorable tax regime for corporations which led to greater investment in corporations formed there.
Delaware’s popularity is also self-perpetuating. Because Delaware became so popular for forming corporations, it established and maintained a set of special courts focused solely on corporate legal issues. This is known as the Court of Chancery, and it still exists today. Unlike most court systems that handle all kinds of cases, the Delaware Court of Chancery focuses almost exclusively on corporate law. It is also set up with a focus on speed. With its long history, the Court of Chancery also has well-established rules for various common business entity issues, such as shareholder rights claims, M&A litigation, fiduciary duty litigation, and corporate governance disputes. Because of these rules, shareholders in Delaware corporations generally know what to expect if a dispute arises. This familiarity makes investors more comfortable investing in Delaware-based corporations.
These factors have driven many large publicly traded corporations to incorporate in Delaware. Many smaller private corporations also incorporate in Delaware, particularly if they plan on taking capital investment from venture capital or private equity investors.
But this doesn’t mean that Delaware is the best choice for everyone. Sometimes it’s better to take the simple route and forming a business entity in the state where the business will primarily operate. The decisions in setting up a business, and where to file, is complicated, and you should consult a knowledgeable business attorney to discuss your situation.
