State of Delaware corporations: better than other states? For residents, the answer is usually yes. For nonresidents, it is probably no. Unfortunately, there are promoters who hype business formation there indiscriminately. Two claimed benefits are that big companies were formed there and that their law and courts are better.

BENEFITS FOR RESIDENTS: Residents in any state are almost always better off with home state incorporation, where they live and do business. Home state laws require companies somewhere else to qualify to do business with the home state. This means virtually doubling expenses, initial and continuing. The company will have to maintain a registered agent both places and must pay not only the original formation cost, but the qualification cost with the home state as well. Annual reports must be filed both places.

NONRESIDENTS OF DELAWARE: This is not the spot for a detailed comparison with respect to the corporate laws in the 50 states, but some observations can be made. To the typical business start up, where the owners and managers are the same, laws which tend to protect big company management in their dealings with stockholders are not helpful. So far as the courts are concerned, even if a start up company becomes embroiled in litigation, it's unlikely that a corporation law question will arise, and extremely unlikely that any such litigation is going to be in the Chancery Court in Delaware. There may be an advantage for General Motors management (which can well afford to maintain itself in multiple states), for example, but this rationale simply doesn't apply to the typical business start up and seldom outweighs the higher initial and continuing costs involved in creating and maintaining a company in two separate states.

You may have heard other reasons. We form Delaware companies all the time, have nothing against the state, but have yet to hear a reason which convinces us that all entrepreneurs are better off forming there rather than in their home state.


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