The laws and requirements governing business entities are made primarily at the state level. Thus, each state may impose different requirements on businesses incorporated in that state. So why do businesses incorporate in Delaware vs. California and should you incorporate your social enterprise in Delaware or California?
Why do Businesses Incorporate in Delaware vs. California?
Some of the main reasons that businesses incorporate in Delaware are as follows:
- Delaware's Court of Chancery is dedicated to resolving disputes regarding the internal affairs of businesses which gives significant guidance and certainty to business owners and investors;
- Delaware law provides more deference and protection to Corporate officers and directors than other states;
- Delaware provides favorable franchise tax treatment to businesses;
- For all of the reasons just listed, equity investors, particularly professional angel investors and venture capitalist, often prefer for the business to be formed in Delaware.
Based on these reasons, if you are planning to seek equity investment from angel investors and/or venture capitalists, then they are likely to prefer that your business be incorporated in Delaware (although it is certainly not out of the realm for professional investors to invest in businesses incorporated in California).
It is important to note that a Delaware enterprise that "does business" in California will be subject to California franchise taxes in addition to Delaware franchise taxes.
Should my Social Enterprise Incorporate in Delaware or California?
Our answer to this question is unfortunately the classic lawyer's answer - it depends. Social enterprises can be organized as any number of entity types and the factors to consider when choosing a business entity can be found here. If you are planning to incorporate your social enterprise as one of the business entities that were specifically designed for social enterprises (benefit corporations or flexible purpose corporations), then you should consider whether to incorporate in Delaware vs. California. Check out this article if you are interested in the differences between benefit corporations and flexible purpose corporations in California. After reading that, if you plan to move your enterprise forward as a flexible purpose corporation, then California is your only choice because only the Golden State has flexible purpose corporations. But if you are interested in incorporating as a benefit corporation, then read this article on Delaware vs. California Benefit Corporations.
DISCLAIMER: The information in this article is provided for informational purposes only and should not be construed or relied upon as legal advice. This article may constitute attorney advertising under applicable state laws.
