The startup’s dilemma — to incorporate in Delaware or stick with your home state (or somewhere else). OK, maybe this isn’t the biggest dilemma or problem your startup will have/is having. However, it can be a difficult decision to make for some startups whose direction is unknown to some extent. Let’s weigh the pros and cons to registering in Delaware and registering in your home state to see what might fit your situation best…

Delaware Pro’s and Cons

Pros:

  • Very well established caselaw that is decades old and laser focused
  • Easier to make decisions and have reliable sources of information to determine the likely outcome of disputes
  • Investors like it (for the reasons above)
  • May be inexpensive compared to your home state
  • Court of Chancery — a court that only decides disputes related to corporations
  • Serial LLC’s if that’s your thing

Cons:

  • Have to pay extra fees for a registered agent
  • If a dispute arises you have to retain counsel in Delaware and may have to travel for hearings
  • You’ll still likely have to file some form of registration in your home state for conducting business there
  • Annual fee structure can be confusing when dealing with earnings and business/stock valuation
  • Have to find a local lawyer who knows Delaware rules and regs — or work with someone across the country
  • Delaware is progressive on business law, but is still stuck in 1992 with fax and mail being their only filing options.

Home State Pros and Cons

Pros:

  • One set of fees to pay and track
  • Because it’s local you can go to your local secretary of state to resolve some issues in person
  • Easy to find a lawyer to work with since they’re all familiar with your local corporate law
  • Perfectly fine if you don’t plan on getting investors or acquired

Cons:

  • Some (many) investors will want you to switch to Delaware before they invest
  • Legal fees associated with switching to Delaware
  • Your state may have less well established corporate caselaw, or law less favorable to businesses

What’s Right for You?

That’s a question you’ll need to ask yourself, discuss with your partner, and consider with the advice of an attorney. I’ll say what I told an asker on Avvo — if you believe that you’re going to be accepting investment dollars within your first one to two years, or you think you’ll be acquired in that time, then you would probably want to incorporate in Delaware from the beginning. There’s no real reason to spend the extra legal fees re-incorporating, changing contracts, etc. for switching six months after you set up shop because someone is ready to write you a check.

Of course, if the above scenarios are not ones you think will be happening, then there may be no benefit to being incorporated in Delaware just because everyone else is doing it. You’re paying a bunch of extra fees, paying a registered agent, and tracking two sets of paperwork for nothing.

Either way, this is just general information and opinion. It may or may not apply to your situation and the caveat, as always, is that you should sit down and speak with a business attorney to see what’s right for your situation.
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Hi, I’m James and I’m an attorney in Boston. I focus exclusively on the unique needs of startups. If you want to chat, catch me on twitter or reach me through my website.

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