Most people should not incorporate or organize their entity in Delaware. Now, I know that many advisers recommend organizing in Delaware and there are times when it is appropriate. Delaware has created and refined well-designed statutes and efficient, professional courts to make it easy, predictable and respectable to form your business entity in Delaware. Like Hawaii has tourism, Delaware has business formation. Delaware leaders have made the state a haven for forming corporations and LLCs. Sort of like the old joke, “no manager ever got fired for buying Microsoft products…” No one looks stupid for forming an entity in Delaware.
But, it isn’t the best choice for most companies. First, if you file in Delaware but you headquarter in any other state, then you have to also organize your entity with the state where you stand. That’s an extra expense and extra tax filings. Second, if you aren’t standing in Delaware, then you have to pay someone to serve as your “registered agent” in Delaware to represent you on the ground. That’s also an extra expense. For many big companies, those extra expenses are not even pocket change, so who cares. But, if you are a small company, bootstrapping your way to profitability, every cent counts.
There’s a third, more important danger to organizing in Delaware. If you get in a fight with your co-owners and you want to sue them to bust up the company or enforce the operating agreement, you have to sue them in Delaware. That means you have to find a Delaware lawyer, hire the Delaware lawyer and then go to Delaware for hearings. Having to sue in Delaware is no hardship to a big company. But, to a small company, dealing with Delaware courts is expensive, time consuming and frustrating. Moreover, most normal people don’t care if you incorporate your company outside of Delaware except for venture capitalists and their brethren, investment bankers. But, only .05% of businesses will reach that peak.
For all these reasons, it may be more efficient to just organize in the state where you stand. Later, if you go public or you get involved with venture capital, you can move your state of organization to Delaware. Bottom line: stay local.
P.S. And, if you must form your entity in Delaware, then do this: stick a forum selection and consent to venue and jurisdiction clause in your operating agreement or shareholders agreement that allows you to sue in a convenient location.