Top Reasons Startups Prefer Delaware
Delaware’s business laws as well as economic and tax climate makes it possible for starting a business in Delaware. The year 2019 witnessed 226,000 new business formations and according to the U.S. Small Business Administration report, 84,675 small businesses were formed in 2020. In 2019, the Delaware economy grew at an annual rate of 2.3% vis-à-vis of the overall US growth rate of 2.1%. The most popular form of business among startups is limited liability company (LLC) and business corporations (INC). There are several reasons why entrepreneurs prefer Delaware startup registration, so let us take a look at some of them
Venture capitalist/Angel investors prefer Delaware companies
Venture capital firms and angel investors normally prefer Delaware companies due to several reasons. One of the important reasons is the Delaware laws and procedures that govern entities help in protecting investors. This is also one of the reasons why it is considered to be a business-friendly state. In fact, Delaware startup incorporation is more preferred by VC’s as compared to an LLC or an S-Corp. This is because S corporations and limited liability companies are both pass-through entities and this means the profit and losses will go into the owner’s tax returns. Since, a venture capitalist funds are from big institutional investors it will create tax related issues for the investors and their funds hence an S-Corp or LLC Delaware startup registration is not preferred.
Secondly, by law S Corporation requires all its shareholders to be U.S. residents, citizens, and “natural persons”. Unfortunately, a venture capitalist firm does not qualify as a “natural person,” hence investment is not possible if your Delaware startup incorporation is an S corporation. There is another disadvantage for investors or VC’s, which is that an S corporation will be able to offer only one type or class of stock. Delaware company incorporation can offer preferred stock. Professional investors like it more than common stock as the former allows the shareholders the rights to be negotiated according to the deal. As a result, a venture capitalist firm opts for preferred stock to minimize any adverse exposure in a business.
Tax friendly state
Delaware is one of the few states that are more famous as a “Corporate Tax Haven”. The tax friendly climate attracts different types of businesses including financial companies and is considered as the single-most impactful reason for Delaware startup incorporation. In fact, the low tax and no sales tax environment has made the Corporation Trust Center at 1209 North Orange Street famous in a unique way. This is a single-story building located in Wilmington, Delaware and is home to 285,000 separate business entities including big names like Apple, Bank of America, American Airlines, Wal-Mart, Coca-Cola, Cargill, General Electric, JPMorgan Chase, Google, Ford, and Berkshire Hathaway. Some of the other tax benefits that you can enjoy post Delaware startup registration are:
- One of the advantages of starting a business in Delaware is that there is no Delaware corporate tax on goods or services provided by a Delaware business operating from outside the state.
- There is no Delaware corporate tax on any interest or any form of investment income at a holding company that one may earn while being based in this state.
- There are no stock transfer taxes or capital shares taxes in the state
- The state does not have any inventory tax, use tax, or unitary tax
- Once Delaware startup registration is complete and business is operational, you will not be required to pay any business taxes on intangible income
- You will not be required to file any personal property tax
- You will not be required to file any ad-valorem or value-added taxes (VATs)
Flexibility of Delaware corporate statutes
The foundation for most business advantages in Delaware lies in the Delaware General Corporation Law (DGCL). The DGCL is known to provide both predictability and stability and thus becoming a fundamental reason behind the higher numbers of Delaware startup incorporation. The corporate law has not only been shaped by the experts from the corporate law segment but is also protected from any influence by any special-interest groups. The positive is that the Delaware legislature reviews the Delaware General Corporation Law each year in an effort to ensure that it is able to address most of the current business related issues.
The DGCL is considered to be an enabling statute and includes certain mandatory requirements that not only provide flexibility to business entities but also help in protecting investors. The DGCL will come into effect post Delaware startup registration and this specialized contract law governs the various duties, roles, and relationships that exist between investors and the corporation or business itself.
Greater privacy protections
One of the top benefits of starting a business in Delaware is that you will enjoy greater privacy protection. This protection comes from the fact that a business entity or a corporation is not required to disclose the name of the director or officers on their formation documents. As a result, the names of LLC members or directors of a corporation will not be available publicly thus offering greater privacy.
Easy and fast startup incorporation process
One of the benefits of starting a business in Delaware is the ease of the formation or incorporation process and running your business. You can use our services for Delaware company incorporation as we have the experience and a dedicated team of professionals who understand the new business formation process in the state. We at IncParadise have helped more than 20,000 companies to bring their ideas to life by helping them register their business successfully.
If you are planning to form a startup in the state all by yourself then all you need to form a company are the following:
Register a new Business in Delaware at the click of a button!
Business friendly laws
One of the important reasons that have driven the formation of almost half-million business entities in Delaware is the business friendly laws. The state has a flexible corporate law and the highly respected Delaware Court of Chancery. One of the many business-friendly laws is that you don’t need to be a resident of the U.S before filing for a Delaware startup incorporation and the cost of incorporation is also one of the lowest in the nation. One of the salient highlights is the Court of Chancery, which uses judges instead of juries. The judges possess the necessary exposure and expertise in various issues pertaining to business law thus making corporate dispute resolution highly efficient.