Is Delaware Still the Best Place to Incorporate?

For decades, Delaware has been the go-to jurisdiction for businesses looking to incorporate in the United States. Delaware’s business-friendly laws, well-established legal precedents, and efficient chancery court system have made it a favorite among entrepreneurs and large corporations alike. Notably for tech startups, these same features also attract venture capitalists who prefer to invest in Delaware corporations. However, following Tesla’s recent reincorporation in Texas, it’s worth reexamining whether Delaware is still the best choice for incorporation. Although Delaware likely hasn’t been dethroned just yet (as of Delaware’s most recent report in 2022, roughly two-thirds of Fortune 500 companies and 79% of all IPOs involved companies registered in Delaware), it’s also worth keeping an eye on other up-and-coming states.

Important Note: There are many other factors that should be considered when choosing where to incorporate your company. For example, some states may offer better venues if you are ever sued for patent infringement. It is important to discuss applicable issues with trusted counsel before making any decisions.

Nevada: No Franchise Tax and Strong Protections for Officers

Nevada has taken a strong second-place spot behind Delaware, for a number of reasons. First, Nevada can be less expensive than Delaware: higher incorporation fees in Delaware may be more seriously felt by startups and its franchise tax scales upward, from $175 to $200,000 annually, as more shares are issued. Nevada, by contrast, has no franchise tax.

Additionally, Nevada has incredibly strong liability protections for corporate officers—limiting personal liability to cases where misconduct is intentional, fraudulent, or a known legal violation. This cuts both ways, however, since it also limits the ability of a shareholder or corporation to hold its officers accountable.

Lastly, unlike Delaware (and, recently, Wyoming and Texas), Nevada doesn’t have a specialized state court that handles solely corporate issues. This means that what a Nevada corporation saves in taxes and officer liability may be given up in terms of speedy and predictable resolution of legal challenges.

Wyoming: Blockchain-Friendly, a Chancery Court, and Low Administrative Costs

Wyoming has many of the same advantages that Nevada has over Delaware—namely, lower administrative costs than either Nevada or Delaware and no franchise tax.

More specific to some tech startups, in recent years Wyoming has put significant effort into cutting off and controlling a small piece of Delaware’s corporate market. Specifically, Wyoming has targeted blockchain companies. In 2018, the Wyoming state legislature passed a bill that exempted blockchain tokens from state securities and money transmission law and exempted digital currencies from property taxation. In fact, since 2016 Wyoming has passed 35 laws relating to the crypto space, leading CoinDesk to rank the state number 1 in “crypto hubs” of the United States.

In 2019, Wyoming established its own chancery court. A chancery court is valuable to corporations because its rulings are propagated entirely by judges who are subject-matter experts in corporate law; this leads to more predictable outcomes than juries, which are seen as somewhat of a gamble—a gamble that can result in unexpected multimillion-dollar class-action verdicts. It also leads to speedier outcomes because the court is streamlined for, and hears only, corporate law cases.

But the establishment of a chancery court is only the beginning. Because the Wyoming chancery is new, it doesn’t have the centuries of caselaw that sets Delaware apart and bolsters Delaware’s predictability. In other words, anticipating how the Wyoming chancery will land in future cases will be tough without a rich body of past cases to look back on.

Texas: Elon’s Favorite and a Specialized Business Court

Rather than being motivated by a specific quality or practice that makes Texas uniquely favorable for incorporation, Tesla’s move to Texas was an attempt to escape the Delaware chancery’s jurisdiction following its blocking of Elon Musk’s compensation package earlier this year. Nonetheless, some noteworthy developments might make Texas more judicially favorable in the future.

Texas created its own specialized business court last year. Again, while a good first step, this has the same limitations as the Wyoming court—namely, that Delaware has an immense head start. But, as one law professor notes, the new court will be sensitive to its reputation and might be hesitant to risk alienating investors by taking a strong stance that favors officers over shareholders. Also worth noting: Texas falls within the Fifth Circuit of the U.S. Court of Appeals, seen as the most conservative federal circuit in the United States and, consequently, the most favorable to businesses.

Delaware See, Delaware Do

Although Nevada and Wyoming have carved out smaller market niches where they have been able to provide unique benefits in special cases, as UCLA Law Professor Stephen Bainbridge notes, Delaware’s legislature is really efficient at copying other states’ legislative strategies when they’ve been shown to work. So, for example, if Wyoming’s crypto-facing strategy is successful at drawing in more corporate charters, then Delaware may attempt to emulate it and provide the same benefits, thus stripping Wyoming of its advantage in that area.

That, among the other advantages and benefits mentioned above, continues to make Delaware likely the best place to incorporate your business.

*Perkins Coie Summer Associate Nathan Reader contributed to writing this blog post.