Should I Form My Startup in Texas or Delaware?

Should I Form My Startup in Texas or Delaware?

     New startups always face the decision of where to incorporate. Often they have heard that Delaware is the ‘best’ place to incorporate for tax or corporate governance reasons. Business owners are not aware of the added duties and responsibilities of incorporating outside of your state of residence. The default should always be incorporating in the state of operations or residence.

     Some reasons that businesses choose to incorporate in Delaware include the established case law, securities considerations, and broader corporate governance.

Delaware has many corporations that call the state home and has had more corporate case law than any other state. This abundance of case law has allowed the state to settle many typical issues and eliminate ambiguity. The judges are generally more knowledgeable about complex business litigation that other states.

     Sophisticated investors will often expect or even demand that Delaware be the state of incorporation. The protections offered to investors and corporate governance leads many venture capital firms to only invest in Delaware corporations. Delaware courts will defer business judgements to the corporate board and officers. Delaware protections for corporate governance makes every business decision that much easy for investors.

     Another important consideration in choosing Delaware as you startup your corporation is that it will be more expensive converting to a Delaware corporation later. The process converting the employee payroll, taxes, the board, and the paperwork will compound every year you exist before you convert.

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     While organizing your startup as a Delaware corporation may sound good now, the downside is that you will be required to double up on business organization filings. All of the Delaware requirements must be filed in addition to operate in Texas you will be required to file as a foreign corporation, about $750 per year. Franchise taxes will be owed to both Texas and Delaware yearly. As the business grows, the cost of compliance in each state will multiply. Incorporating outside of Texas will cost more as a startup and increase as you grow.

     The primary reason you would incorporate in Delaware instead of Texas is if you anticipate raising professional venture capital. Outside of this possibility a Texas business will save more money by remaining in Texas. Unless you are facing a round of venture capital with an established securities firm, stay in Texas. Reidel Law Firm can help you save even more money for your business with our flat fees and service levels. We give Texas small businesses the certainty needed for legal solutions by pricing flat fee, upfront. No more retainers and endless billing hours. Call or email us today for a free initial consultation.