Ohio-based Entrepreneurs often ask whether they should be incorporating in Ohio or if they are better protected by incorporating in Delaware or some other jurisdiction.
For various reasons, some founders choose to incorporate in Delaware even if their principle place of business will be Ohio. These reasons often have to do with taxes, liability of management and governance of the corporation. However, the primary reason that many tech startups choose to incorporate in Delaware is finance.
Venture capital firms usually insist that a company be structured as a Delaware corporation in order to receive funding. This is because VC firms are familiar with Delaware corporate law, which matters both for their obligations as directors on the portfolio companies’ boards they serve on, as well as familiarity with the legal treatment of various transactions. Likewise, VC and startup attorneys are typically well versed in Delaware law applying to corporate transactions.
Most of the advantages offered by Delaware incorporation do not apply to small startups who may never receive VC funding or go public. Therefore, the hassle and expense of incorporating in Delaware is usually not worth it for most early stage companies that I counsel. For instance, if a startup is not planning on pursuing venture capital funds, there is limited overall benefit to operating as a Delaware corporation. Similarly, if there will be a long runway to VC, it could be worth considering operating as a different entity type at the outset and then converting to a Delaware corporation when, and if, it becomes necessary to do so.
It is worth remembering that your company can always “reincorporate” in Delaware through conversion, asset transfer, or by creating a Delaware corporation and merging the Ohio corporation into it. While doing so will entail additional legal expense later on, it probably makes sense for most startups to defer that cost until there is a compelling reason to consider Delaware incorporation, such as a major funding event, which would more than justify the added expense.
Therefore, when founders are considering incorporating a company that is not venture scale, I usually recommend Ohio incorporation. If they later decide to pursue a venture scale model, they can deal with reincorporation in Delaware in the face of a multi-million financing. If the company is pursuing a venture scale model, has ties with other states, expects early investments to trigger federal securities laws, or will likely be dealing with institutional investors in the upcoming months, only then would I give more consideration to incorporating in Delaware.