Why do Y-Combinator startups incorporate in Delaware rather than California? | Hacker News Reader

Why do Y-Combinator startups incorporate in Delaware rather than California?

5 pointswaleedka10 comments

Deleware is great because it knows how to deal with businesses.

If I recall correctly, it's one of the only states that has a dedicates Court of Chancery [1]- Essentially special courts that are focused on business law, rather than being generalized.

This lets them build up a large body of precedent , but more, it means the judges are going to be dealing exclusively with civil cases, and can can focus on the needs of businesses.

Because of this, the court has come to be regarded as the countries experts business law. [2]

[1] http://www.delawoffice.com/chancery.html

[2] http://72.14.253.104/search?q=cache:l4-0NQmIQc0J:corporate-law.widener.edu/ctofchan.htm+Court+of+Chancery+delaware&hl=en&ct=clnk&cd=5&gl=us&client=firefox-a

And, as I've heard it, the reason that Delaware has very favorable business laws/legal system is that the DuPont company has been there since about 1800 (not too long after 1776 =). DuPont has been a huge company in a very small state for a very long time. Early on, they were able to set up a very favorable climate for themselves and thusly other corporations, and then things have snowballed from there.

Not sure how California is but read the Delaware wiki about why Delaware's best for incorporation: http://en.wikipedia.org/wiki/Delaware_corporation

Thanks. Quote from the wikipedia article: "Delaware's formation and annual fees are substantially higher than most other jurisdictions." "Franchise taxes in Delaware are actually far higher than in most other states"

And, on top of that, these startups must pay California taxes and other fees because they're operating in CA (for the SF ones). Not to mention having to do paperwork for two states, and then lose some of the incentives CA gives to local corporations. For example, the minimum $800 franchise tax is waived for the first year for CA corporations, but not for foreign ones operating in CA, ASAIK.

So, with all that, there must be a compelling reason to incorporate in Delaware!!! Anyone knows what that might be?

I think the corporation-friendly court system is one of the biggest pluses.

-Zaid

According to my lawyer, the large body of prior precedent in Delaware is the reason: i.e. if you ever wind up in a legal dispute, your attorneys will have a good sense of how your case would be ruled, based on similar case precedent(s).

The short answer would be because the Delaware courts are favorable toward big business, much like New York. A long case history biased in favor of you, the business, is much more useful to you than a case history biased in favor of the consumer (California).

Legal troubles of any sort are a tremendous waste of expense and time and can cripple any company, big and small. That alone is worth incorporating in a company-friendly state.

It is just the long history of case law make it a more "definate" legal venue. Most laws in the US are determined by actual cases, in court, and not in the actual written laws.

Nevada is also popular to incorporate in. I've always incorporated in Nevada because of lack of state income tax and it's favors to small business.

Most American corporations are registered in Delaware. It's just the standard thing to do. I think because legal stuff works best there.

Just to smooth things over for investors. They still have to register in CA and pay California taxes if they operate in the state.

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