The corporate laws of your state of incorporation will govern your internal business operations. You do not need to incorporate in California just because that's where your business is located. Indeed, many publicly traded U.S. companies, regardless of location, are Delaware corporations. There are many good reasons why businesses chose Delaware law. That does not necessarily mean that Delaware is right for you.
Why is Delaware So Popular?
More than 65% of Fortune 500 companies are incorporated in Delaware. But, why?
Delaware's Court of Chancery was established in 1792. Having such a long history, Delaware General Corporations Law (DGCL) is built on an enormous body of case law covering expansive corporate issues. This makes Delaware corporate laws deeply sophisticated and relatively predictable.
Although Delaware's business incorporation fees are lower than most other states, the large quantity of business filings make them the state's 2nd largest source of revenue. Recognizing this economic importance, Delaware legislatures stay on top of modern corporation and tax laws and regularly adjust their statutes to accommodate business trends.
Benefits of Delaware Corporate Law:
- In-depth consideration of corporate issues.
- Highly experienced business judges.
- Expedient and well-reasoned opinions.
- Predictable legal outcomes.
- More flexibility for corporate management.
- Protection for management's decisions.
- Protection for owner's personal assets.
- Preferred by venture capital investors.
So, Why Incorporate in California?
For small business owners located in California, incorporating in Delaware—or any foreign jurisdiction—has drawbacks that may outweigh the advantages. You will still need to register in California regardless of where you incorporate. California based corporations incorporated in a foreign jurisdiction are still required to pay California franchise tax, so there may be more of a tax burden than a benefit. Further, you will need to keep up with regular filings in both states.
If an out-of-state corporation is located in California, the California Corporations code may still enforce California law in some circumstances..
Fortunately, California has replicated much of the DGCL, bringing many of the benefits of Delaware registration to the West.
Picking the right state for your entity is an important step in forming a business. Consult with an experienced attorney to ensure you make the right choice for your venture.
This blog is for informational purposes only and is not legal advice.