5 Reasons a California Company may want to incorporate in Delaware

March 2024
Author: Andrew (Drew) Piunti
DPA Law PC
drew@dpalawyers.com

Company founders often ask their California business attorneys whether they should incorporate in California or Delaware.  The answer in the view of DPA Law PC in San Jose is this depends on the founders’ objectives and goals for their new company.

As a California based company (meaning one with its primary place of business in California) choosing Delaware is not going to save on taxes or organizational costs.  The opposite is probably true: a so-called “foreign” (Delaware) corporation based in California will pay, at a minimum, franchise taxes in both Delaware and in California, and pay to have an agent for service of process in Delaware.  So why Delaware?

If the founders plan to bootstrap the company with their own money and grow its operations from revenue rather than bringing in outside investors, there may be no tangible benefit to organizing in Delaware.  If, however, one’s goal is to signal to the angel investors and venture capitalists the intention to be a national company serious about receiving third-party investment, then Delaware is likely your preferred choice.

These are the primary reasons for incorporating in Delaware:

1. U.S. angel investors and venture capital funds tend to prefer to invest in companies incorporated as a sub-Chapter “C” corporation in Delaware versus any other state or any other type of corporate entity (i.e. LLC’s, or LLP’s.)  If the founders intend to receive investments from these types of third-party investors, they will probably want to incorporate as a C corporation in Delaware.
2. Many investment bankers insist on a U.S. company being incorporated in Delaware before they attempt to take same public.  So, if an IPO is a possible exit strategy, one may wish to incorporate in Delaware rather than having to later convert to a Delaware corporation.
3. Delaware corporate statutes provide a great deal of flexibility in the organization of a corporation and the rights and duties of board members relative to stockholders.  The principle of freedom to contract to adjust relationships is considered stronger under Delaware corporate law than under California corporate law.
4. Delaware maintains separate courts – the Delaware Court of Chancery – which specialize in corporate matters.  The Court of Chancery has expertise and a sizable body of case law for resolving corporate disputes.  This established Delaware jurisprudence suggests enhanced predictability in terms of the likely judicial result in the event of a corporate dispute requiring litigation.
5. Many corporate attorneys in the U.S. practicing corporate transactional law are familiar with the Delaware general corporation law—even if they are, for instance, California lawyers.  This means that absent a merger or similar transaction, there is generally no need to consult a Delaware lawyer in addition to your local California corporate attorney to incorporate in and operate as a Delaware corporation.

Ultimately a California based company incorporating in Delaware is a matter of its founders wanting to signal the investment community that the company understands the preferences in the marketplace and is serious about attracting sophisticated third-party investors.