What’s So Great About a Delaware C-Corporation?
If you’ve spent any time looking at U.S. companies, you’ve likely noticed that an unusually large number are organized as Delaware C-Corporations. Similarly, many startup founders seeking to choose a business entity are counseled to form Delaware C-Corporations. But with so many great states to incorporate in, you’re probably asking yourself, “What’s so great about a Delaware C-Corporation?”
For many decades, Delaware has made itself the destination of choice for U.S. companies through its General Corporation Law. Delaware corporate law favors directors and minority shareholders relative to other states, provides for tough antitakeover laws, and protects the identifies of shareholders and directors. These policies are thought to attract businesses on the theory that the directors and managers enjoy better flexibility and protections. Additionally, Delaware’s non-taxation of royalty payments allows corporations to avoid some tax in other states by transfering intangible assets to Delaware.
Once a business is based in Delaware, disputes are litigated in front of the Court of Chancery, perhaps the most well-known advantage of doing business in Delaware. The Chancery Court is one of the nation’s oldest equity courts and it spends almost all of its time hearing corporate cases, typically without a jury. As a result, the five judges of the Chancery Court are some of the nation’s leading experts in business law who are capable of hearing and deciding complex corporate cases with remarkable efficiency and understanding. Additionally, the extensive case law coming out of the Chancery Court has created a well-known and predictable set of rules for corporations in the state.
It is important to note, however, that Delaware is not the only state competing for businesses and there is some evidence that the benefits of a Delaware C-Corporation are minimal or fail to justify the costs. In the face of this evidence, the fact that Delaware continues to be the go-to state for C-Corporations illustrates one of its most significant advantages – inertia. Delaware’s long-standing reputation means that today’s corporate lawyers often choose Delaware by default. Venture capitalists and angel investors generally require a Delaware C-Corporation, as do many investment bankers looking to take a company public. In general, a Delaware C-Corporation is a signal to the market that you’re a “serious” company. For all of these reasons, Delaware is unlikely to lose its favored status in the near term.
The benefits of a Delaware C-Corporation include the state’s corporate and tax laws, the Court of Chancery, and the inertia created by decades of developing a business-friendly reputation. While a Delaware C-Corporation doesn’t make sense for many startup companies, a significant portion of successful startups will end up converting to that form. In any case, these advantages illustrate why so many companies are formed as Delaware C-Corporations and why that that will continue to be the case in the foreseeable future.