When A New York Startup Should Incorporate In Delaware
The default is a default for reasons. They apply to some companies and not to others.
Founders in New York are routinely advised to incorporate as a Delaware corporation. The advice is sound often enough to have become automatic, which is a reason to understand what it is actually for.
What Delaware provides
Delaware offers a well-developed body of corporate case law, a specialist court that hears business disputes without juries, and a statute that has been amended continuously in response to how companies actually operate.
For an investor, this means predictability. The documents are familiar, the governance questions have known answers, and no one needs to research an unfamiliar state's law to price a deal.
Why investors expect it
Institutional venture investors are set up to invest in Delaware corporations. Standard financing documents assume that structure. A company organized differently is not un-investable, but it introduces friction at exactly the moment friction is most expensive.
If you intend to raise institutional venture capital, incorporating in Delaware at the outset is cheaper than converting later, and conversion is a real project involving consents and tax analysis.
What it costs
A Delaware entity operating in New York must also register to do business in New York and comply with both states — two sets of filings, two sets of fees, a registered agent in Delaware, and Delaware's franchise tax.
That franchise tax is a common shock. Computed one way it can produce an alarming bill for a company with many authorised shares; computed the alternative way it is usually modest. Companies that receive a large notice have generally not run the alternative calculation.
When not to bother
A consulting firm, an agency, a restaurant group, a business that will be funded by its own revenue and by bank debt — none of these gain much from Delaware, and all of them pay for it. A New York LLC is frequently the better answer, with a simpler tax profile.
The question is not which state is best in the abstract. It is whether you are building the kind of company whose future owners will expect Delaware.