Why Do Most Startups Prefer to Start Businesses in Delaware?
Delaware is home to more than one million businesses and this is largely because of the business-friendly corporation law and pro-business environment that the state offers. Most modern day entrepreneurs prefer starting a business in Delaware due to the several advantages and state benefits that one can leverage. The state is considered to be a tax haven and at the same time, it’s strategic location and high economic growth rate enables companies to maximize their revenue and growth as well. Delaware company incorporation is also favored by investors and venture capitalists thus ensuring capital investments. This guide has been created to provide an insight into the existing startup ecosystem in Delaware and the various reasons why investors and startups prefer to form or incorporate in this state.
There are several decisions and considerations that an entrepreneur has to make towards Delaware startup incorporation. Yes, choosing the right destination is quite an important consideration as it can have a long-term impact especially when startups are seeking outside funding or capital. It is no secret that startup accelerators, angel investors, and venture capital firms prefer and sometimes even require Delaware startup registration or incorporation prior to making an investment. There are a wide variety of reasons for this preference but the truth is that, not registering in Delaware can be quite the potential roadblock for entrepreneurs or startups. More than that, the state of Delaware has an entrepreneurial ecosystem that supports innovation making it one of the top 10 best startup states in the nation.
Startup ecosystem in Delaware
The startup ecosystem in Delaware is known for its high level of innovation and creative spaces, which is supported by a diverse workforce, a pro-business legal and regulatory environment, top universities, and a strong line of support programs for starting a business in Delaware. The state supports innovative startups and enterprises with a host of incentive programs right from Financing to business development and R&D. Some of the programs that form a part of the startup ecosystem include:
- Loan and Capital: There are two programs that you can benefit from post Delaware company incorporation and they are the State Small Business Credit Initiative Participation Loan and Delaware Capital Access Program. These programs are geared towards providing financing to entrepreneurs and businesses that are considered to be highly risky where the traditional banking model is concerned.
- Innovation programs: After starting a business in Delaware, you can become a part of the Delaware Technical Innovation Program, which offers transition grants to companies that have applied for the Small Business Innovation Research (SBIR) or Small Business Technology Transfer (SBTT) programs.
- Grants: A Startup ecosystem can never be complete without grants and hence the Encouraging Development, Growth, and Expansion grants (EDGE) and Workforce Training Grants are considered to be a strong support system for businesses. Your startup can get funds up to a maximum of $100,000 through either of the grants.
- Credit Programs: There are several credit programs that you can enroll into after Delaware startup registration. The two most important programs are Angel investor credit and the R&D Tax Credits. These programs specialize in lowering payment on taxable expenses or providing refundable tax credit to qualiﬁed investors.
Another important aspect of the startup ecosystem in Delaware is “Entrepreneurial Meet-ups”. These meet-ups can be a driver for starting a business in Delaware. The meet-ups consist of various Delaware networking groups that create a space and environment for entrepreneurs and small business owners to meet, discuss, build fruitful relationships, and expand networks. Delaware offers a platform for entrepreneurial events to take place that allow entrepreneurs and business owners to showcase their startups or present innovative products and services. A Delaware startup registration will open the doors to using “Co-working Spaces” and incubator programs.
Major companies and start-ups in Delaware
Today, Delaware is home to some of the biggest names in business like DuPont, Incyte, and Gore. The business ecosystem is considered perfect for Delaware startup incorporation as the state is ranked #6 in the U.S State Innovation Index and #1 for Patents Issued Per Capita. The “First State” is ideal for Delaware company incorporation and today some of the most promising young IT and tech companies are mushrooming in the state. The reality is that when you are asked to think about a startup environment then the first place that comes to the mind is the Silicon Valley and today the state of Delaware has a few of its own. In fact, Delaware has a diverse startup environment right from agriculture based agtech startups, fintech, and medtech and science startups. There is a host of new Delaware startup registration going on in the state right at this moment!
Delaware situated in the Northeastern United States is a popular destination for Delaware startup incorporation including 66% of the Fortune 500 companies. Some of the largest firms include Chemours, Navient Corporation, 21st Century Insurance, DuPont Company, Dogfish Head Brewery, W. L. Gore and Associates, Integrity Staffing Solutions, Wilmington Trust, WSFS Bank, Delaware Intercorp, Citizenre, Grant & Eisenhofer, Nassau Valley Vineyards, and Tritek among others. Some of the top and recent Delaware startup registration includes Scalarr, Rarible, Oyster, Latitude, StrategyConnect, and Tradologics and they have received a total funding amount of $397 million.
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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:
- Choose a name for the Delaware startup
- Check name availability and reserve the name
- Hire a Delaware Registered Agent
- File Delaware company incorporation paperwork with the Division of Corporations
- Obtain business licenses or permits as required by your business
- Apply for and obtain an Employer identification number (EIN)
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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.
Ready to Incorporate in Delaware?
A startup or a new business needs a good business climate, strong but business friendly laws, state incentives and funding opportunities, economic opportunities, robust infrastructure, and tax savings and you can benefit from all this through a Delaware startup incorporation. IncParadise is a Delaware incorporation specialist and we can help you with the process of Delaware startup registration. You can also take advantage of our online filing system, which is easy to use and highly efficient.
We also offer a host of additional services like foreign qualification, EIN assistance, S Corporation status election, and Delaware Certificate of Good Standing among others. These services will help you to start your business with low cost.