Incorporation is the process of formally starting a business that has the ability to obtain shareholder and raise capital. Every startup that desires to raise capital through investment wants to make it as easy as possible for investors to jump in.
One for the first steps that a business must take is deciding where to incorporate. Startups do not have to be incorporated in the state in which their headquarters is located. Owners have some leeway to choose where they would like to incorporate their business. Although the traditional rule is that a business should incorporate in its home state, startups often find it prudent to ignore this rule. Many startups have found it beneficial to incorporate in Delaware and make foreign qualification in California rather than directly incorporating there.
Let’s look closer at what their motivation was and how they’ve done it…
Incorporating in Delware: Why?
One of the primary reasons for incorporating in Delaware is that it offers a good structure of member positions in companies. This becomes very important as the company starts to grow. Well, it’s no coincidence that more than 60% of Fortune 500 companies are incorporated there.
Before your company goes public, there’s good chance your attorneys will advise you to move the company to Delaware. That’s not a problem, but it will be less complicated and much cheaper to incorporate in Delaware from the start.
Another advantage of this corporate heaven is their famous Court of Chancery that only handles business and corporate affairs. Thanks to its specialization it can handle even the most complicated cases. Corporate law is very well documented and covers lots of possible problems that can occur both within a company and between them.
So how do you incorporate in Delaware and enjoy the Californian sun and investors at the same time? You incorporate in Delaware and then register your business in California. This process is called foreign qualification. It’s common practice, so there shouldn’t be any unexpected difficulties.
Since it’s not the main concern of Californian tech startups, Let’s look at cost of both possibilities, incorporating in California and Delaware. Incorporating a C-Corp in California will cost approximately $300 with registered agent (also don’t forget about the $800 franchise tax).
Incorporating in Delaware with registered agent will cost $400 plus the foreign qualification fee in California which is approximately the same as for incorporation, $300. It is important to note that in the second instance you have to pay franchise tax not only in Delaware, but in California as well. Therefore, incorporating in Delaware and registering this company in California will cost $575 more than incorporating solely in California (Note that prices are approximate).
Before you make a decision, look at the specifics of your startup. There’s a chance that incorporating in Delaware isn’t the best option. Don’t be fooled by people who say that investors require the company they’re going to invest in to be incorporated in Delaware. It’s true that investors often prefer when the company is incorporated there, but it’s certainly not a deal breaker. Can you imagine an investor who would pass on the next Google or Apple just because it was incorporated in North Carolina and not in Delaware?