Situated smack in the middle of Washington DC and New York, the political and financial hubs of the US, Delaware is a small territory with a big reputation.
President Joe Biden is arguably Delaware’s most famous son, but for startup founders and investors it is just as well known for being a location for company incorporation and a tax haven.
Multinational corporations from Barclays to British American Tobacco operate from the state, as well as many startups from Europe which use Delaware as a point of entry to access the world’s largest venture capital market: North America.
In 2022, more than 313,650 entities were formed in the state, and total business entities reached 1.9m. It’s expected that Delaware will surpass the two million mark in 2023.
So, why is Delaware so popular, and how do you go about setting up a company there?
David Smallman, global advisor at economic development agency Delaware Prosperity Partnership (DPP), tells Sifted that “the legal and liability protection of established corporate laws [...] provided a clear and flexible legal environment from which businesses can operate.”
But one of the primary reasons startups choose Delaware is tax. Delaware offers a lower tax rate, with corporate income tax at 8.7% compared to New Jersey, where it is 11.5%.
Businesses registered in Delaware that don't operate in the state don’t pay corporate income tax, and shareholders who don't live there don’t pay tax on shares. Delaware has no sales tax, investment income taxes, inheritance taxes or personal property taxes.
Then there's the fact that, for US investors, Delaware is familiar, says Mikhail Taver, fund manager and founder of venture fund Taver Capital.
“All other things being equal, an investor would prefer a familiar case with known pros and cons over researching an exotic location,” Taver says.
Max Azarov, CEO of edtech startup Novakid which is registered in Delaware, said he chose the state “because of the ease of setup, the ability to establish and manage our company remotely, and no income tax for out-of-state corporations.”
And despite the fact that other US states now offer similar conditions for companies, like zero tax for out-of-state corporations, “Delaware has become a de-facto standard with VCs.”
Venture capital accelerator VC Lab says that over 60% of new VC managers are choosing Delaware as the domicile for their firms and funds due to its “clear regulatory framework, cost-effectiveness and stability.”
Setting up your business in Delaware
More than one million companies from around the world call Delaware their legal home — including two-thirds of Fortune 500 companies.
More than half of all US publicly traded companies and an increasing number of startups are incorporated in Delaware, too.
There are several fees when incorporating in Delaware, depending on how the company wants to incorporate. Registering agents review those fees with companies and help them decide which incorporation pathway is the best for them to take.
As a result, fees vary — but they can total as low as $90 (£74) including corporation fee, filing fee and county fee.
“There are no minimum employee numbers or investment requirements to incorporate in Delaware,” adds Smallman. “New companies need a Delaware Registering Agent to create a new entity, but there are many options to work with registered agents.”
Here, Taver shares a simple overview of the process of launching a startup in Delaware:
- Register a company.
- Get an EIN – that’s your tax ID.
- Set up an office with an address and contact numbers – this can be virtual.
- Open a bank account.
- Find a certified public accountant (CPA) to do your books and file your taxes.
Delaware has access to a deep talent pool — nearby, there are more than 150 universities and colleges, as well as medical and other professional schools.
The state’s positioning also means residents of adjacent Pennsylvania, New Jersey and Maryland are within a convenient commute.
“Companies that choose Delaware enjoy unparalleled access to business leaders at the local and state level,” concludes Smallman.
“Delaware’s business community includes companies ranging from small startups to multinational legacy corporations in key industry segments such as life sciences, chemicals, financial services and manufacturing.”