Why Delaware remains the “First State” for business incorporation

One of the first decisions that a business owner must make is selecting a state of incorporation. This is a decision not to be taken lightly, as the state of incorporation affects many aspects of the new business. While Texas and Nevada have received recent recognition as a popular state for incorporation, Delaware still retains the title of the “corporate capital” of the United States. Currently, Delaware is home to over two million incorporated business entities, including approximately 68% of Fortune 500 companies. This popularity is due, largely in part, to both the State’s corporate-friendly tax structure and the Delaware Court of Chancery’s expertise in adjudicating corporate disputes. This article will present several reasons supporting why to support the notion that Delaware still remains the “First State” in the United States for business incorporation.

1. Business-friendly legal framework

One of the primary reasons companies incorporate in Delaware is the protection and stability provided by the Delaware General Corporation Law (“DGCL”). The DGCL is the statute that governs all corporations within the state, and is designed to provide legal and liability protections to both a business and its investors. The DGCL provides flexibility in the structure and governance of corporations, allowing a business owner to conduct their business as they see fit, while taking advantage of protections provided for directors and officers.

In order to adjudicate corporate disputes, Delaware has the revered Delaware Court of Chancery that deals primarily with business disputes arising under the DGCL. The court is a court of equity, in which matters are handled exclusively by attorneys and judges with extensive experience in both the DGCL and business law; cases before the Court of Chancery are not subjected to the uncertainty that is attached to a trial by jury. As an additional benefit, Chancery cases are directly appealable to the Delaware Supreme Court, which is also widely recognized for its corporate law acumen.  By providing attorneys and a judiciary that are both well-versed in corporate law, Delaware has created an efficient legal environment under which substantial corporate case law provides clear and established legal precedent, all of which reduces uncertainty for corporations.

Looking outside of Delaware, the experienced attorneys and judiciary and the well-defined caselaw found with Delaware’s Court of Chancery are not found within Nevada and Texas. While the Nevada business court was designed to resemble Delaware, cases are not guaranteed to be adjudicated within this court, as a business court judge can reject a matter and return it to the traditional civil court system, a decision is not subject to appeal. Texas’ business court system opened in September 2024. Given its infancy, parties before the business court are faced with the uncertainty of rulings, as there is no precedent for the court to rely upon.

2. Privacy and confidentiality

Delaware allows for a high degree of privacy for business owners. The state does not require the disclosure of the names of members in LLCs or shareholders in corporations, which helps protect the identities of owners and investors. This level of confidentiality is particularly appealing to individuals who wish to keep their business dealings private.

In comparison, both Nevada and Texas require an LLC to disclosure the names and addresses of all members of LLC. Once disclosed, this information becomes available to the general public as a public record.

3. Tax advantages

Delaware is known for its favorable tax advantages for corporations. These savings include no corporate income tax, no inheritance tax on stock held by non-Delaware residents, and no state sales tax. Furthermore, a Delaware corporation not operating within the state is not required to obtain a Delaware business license. In total, this structure provides corporations with considerable tax savings.  

When a business is incorporated outside of Delaware, a business owner cannot expect to receive the same tax treatment. For instance, while Wyoming does not have a corporate income tax, corporations are required to pay an annual license fee that is based upon the value of in-state assets. Texas requires corporations to pay a franchise tax that is based on the corporate margin, not revenue.

Conclusion

From its favorable legal landscape to its tax structure, Delaware remains the preeminent jurisdiction for business incorporation. Many investors often view a corporation’s incorporation in Delaware as a prerequisite to a potential investment While Texas and Nevada may appear as attractive alternatives, they are not able to match the reputation for business incorporation that Delaware maintains. For business owners looking to position their business for long-term success, Delaware remains the best choice for incorporation.