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Where should I incorporate my startup?

The vast majority of startups incorporate in Delaware. Delaware corporations are so popular that the legal ecosystem around them is much stronger than for any other type of corporation. There are more tools built for Delaware corporations and every good startup attorney will be comfortable working with Delaware corporations. This can't be said for any other state. And because so many startups incorporate in Delaware, it's also the state that investors are most likely to be comfortable and familiar with.1

Misconception 🙃
You need to be physically located in Delaware to incorporate a Delaware corporation.

The vast majority of Delaware corporations have no physical presence in Delaware. You can incorporate a Delaware corporation from nearly anywhere in the world.2

While most startup attorneys view Delaware as the safest state of incorporation for startups, some people may suggest incorporating in the state where a founder lives. We'll discuss the different factors that go into deciding between Delaware and other states below.

  • 1.

    Unlike some other countries, the US does not have national-level incorporation.

  • 2.

    There are a handful of countries that have been sanctioned by the US in a way that makes it practically impossible for citizens and people in those countries to incorporate a corporation in any US state, including Delaware.

The vast majority of startups incorporate in Delaware, so there is a strong ecosystem of resources around Delaware corporations for startups. If you incorporate in another state, your startup likely won't have access to as many resources. This means you could be more reliant on attorneys moving forward. And the pool of attorneys available for you to choose from could be smaller than if you had a Delaware corporation, since you'll likely be limited to attorneys in the state where you're incorporated. In contrast, all experienced startup attorneys are familiar with Delaware corporations.

Investor Preference

Delaware is the only state of incorporation that practically all startup investors are comfortable with. In fact, it's not uncommon for startup investors to only invest in Delaware corporations. You can always convert a corporation incorporated elsewhere into a Delaware corporation, but you'll need to work with an experienced startup attorney in order to do that safely.

There are some startup investors who are comfortable investing in corporations formed in other states. However, because most startups can't predict who their investors will be and it's important to remove potential obstacles to investment, most startup attorneys in the largest startup ecosystems advise incorporating in Delaware. In some smaller startup ecosystems, if it's unlikely a startup will raise money from anyone other than local investors, some startup attorneys may also present incorporating in their own state as an option.

Ease of Filings

Startups typically don't make that many corporate filings with the state government, but when they do, it's usually at a critical moment (e.g. a financing or acquisition). More so than any other state, Delaware is known for having staff that are professional and don't cause unexpected problems with filings.

Franchise Taxes

Delaware requires all Delaware corporations to pay an annual franchise tax. This generally comes to about $450 for most early-stage startups. In addition, corporations need to register to do business in any state where they have employees. Most startup founders are considered employees, which means startups incorporated in Delaware will need to pay fees and taxes for the states where its founders live, as well as in Delaware. 

Because your startup will have to pay fees and taxes in your home state anyway, some people argue that your startup could save money by incorporating where you live. By doing so, your startup would avoid the additional cost of Delaware's franchise tax. However, most startup attorneys believe these savings are probably outweighed by other factors. Not only will your startup lose out on all the benefits of being a Delaware corporation, but it might end up spending that money anyway due to increased expenses in other areas.

Registered Agent Fees

Corporations generally need to have a registered agent in every state where they have employees (including founders), as well as the state where they incorporated. Very few founders live in Delaware, so the vast majority of startups pay a professional service to act as their Delaware registered agent after incorporating in Delaware. 

Some people might argue that incorporating in the home state of a founder could save money on registered agent fees because then that founder could serve as the registered agent. While this is true, most startup attorneys would recommend against a founder serving as a corporation's registered agent. Reputable registered agents make sure their staff are always on location to receive important notices at all business hours. If you serve as your corporation's registered agent, the chances you'll miss receiving an important notice are significantly higher.

Board Flexibility

A lesser-known factor is that many states have requirements around the minimum number of directors that need to be on the board. Delaware only ever requires one director, which provides for the most flexibility in how a corporation is set up.

Anonymity and Privacy

There is a niche of online advice and services around forming business entities anonymously. Due to anti-money laundering efforts, it's not possible to run a startup in the US completely anonymously.

Nevertheless, Delaware is considered one of the best states for incorporation in terms of privacy. Delaware corporations need to submit an annual report listing all directors and one officer every year. The annual report is considered public record, but isn't freely viewable online. People must pay a fee to request a copy of the report from Delaware.

Some people believe Delaware offers more privacy because it doesn't require directors to be listed in the company's certificate of incorporation, whereas many other states do. In theory, this doesn't add much privacy since people can still pay to obtain a copy of the annual report. However, as a practical matter, this does afford a bit more privacy. There are times when you'll need to share the certificate of incorporation with others and most people aren't going to bother to order the annual report.

Liability Protection

Delaware is widely regarded as having strong protections against personal liability for corporations. Some advisors say Nevada has better protection against personal liability. This is arguably true, but the differences are very unlikely to be relevant to founders trying to build a legitimate business. Some people have also observed that Nevada has an adverse selection problem in that their unusually strong protections attract bad actors. As a result, it's possible that if you incorporate in Nevada, you'll be inviting closer scrutiny.

Crypto / Blockchain Considerations

Wyoming is often mentioned as an alternative to Delaware for crypto and blockchain startups. Wyoming has made significant efforts to enact laws to provide a crypto and blockchain-friendly environment for startups.

However, the startup ecosystem around Wyoming corporations is less developed. Theoretically, there could be instances where a startup with unique circumstances would benefit from Wyoming's crypto and blockchain-friendly environment enough to outweigh this disadvantage. You'll likely need to work with a startup attorney with significant crypto and blockchain experience to see if this might be the case for your startup. It's worth noting that many of the leading crypto / blockchain startups in the US have chosen to be incorporated in Delaware, including Coinbase, Kraken, Yuga Labs (maker of BAYC), and ConsenSys (maker of Metamask).