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Why Should You Incorporate in Delaware?

Most startup companies incorporate in Delaware as a C corporation because of one main reason – it is the industry standard. Most U.S. venture capitalists prefer to invest in Delaware C corporation startups instead of foreign entities or LLCs because these are not the best vehicles for venture capitalists for tax and other reasons.

The investment approval process is fragile; so, as a founder, you want to make sure that there are no major legal hurdles that could add to the challenges of the investment approval process. If you incorporate a company in a less common “startup” state (such as Montana or Ohio for instance), then most likely this will create an obstacle to the legal consummation of an investment. Incorporating in a foreign country could create even bigger problems; unless that country is one in which a venture capitalist has a history of investments, know-how and the advice of local counsel. The wrong geography of legal incorporation has the potential to kill a deal.

Many factors make Delaware the best choice of state for incorporation. First, Delaware’s General Corporation Law is considered advanced and flexible. It is designed to provide maximum flexibility in the structuring of business entities and the allocation of rights and duties among founders and shareholders. Second, as one of the most advanced corporate judicial systems in the world, Delaware courts have a large body of relevant case law dealing with corporate governance, business judgment rules and other legal provisions that protect management teams of companies. Third, incorporating in the state of Delaware provides anonymity to directors and officers; although their names are listed in formation documents, the state of Delaware does not require the public disclosure of those names as a condition of incorporation.

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