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Comment by danray | Hacker News Reader

I'm not sure what you mean here. In almost every circumstance, a Delaware incorporation is the best choice. As the author said, if you don't start there and don't fail, you're likely to end up reincorporating there anyway.

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I live in a state, lets say, California. From what I understand there is alot of people there. ;)

http://www.sos.ca.gov/business/be/faqs.htm#form-question7 If I do business with anyone in California, as an employee who lives and works in California, I'm engaging in intrastate commerce on behalf of the company.

I'm also "doing business in California" as I'm paying over $50k in wages for tax purposes [since Engineers are going to be at least that anyway].

So, now I have to:

1) Incorporate in Delaware, Register as a Foreign Business Entity in California.

2) I need to pay for a registered agent in both states.

3) I need a lawyer familiar with laws in both states or 2 different lawyers.

4) If I do business in Delaware [since incorporation in Delaware makes it intrastate business], I now have a tax nexus in two states which complicates my tax situation.

5) There is no tax or legal obligation to do this, so why shouldn't a person wait until they have to add this complexity?

That is two sets of fees, tax structures, and potentially legal counsel I now require. If I've got 7 figures in funding, sure, this is not a big deal. If I'm bootstrapping with the $20k I have in my savings account, suddenly doubling these costs is not insignificant and may potentially sink me and/or cause me to fail a tax audit with the associated expenses.

I'm uncertain why you think it is 'always' a good idea to do this from the start. Please explain how my reasoning is incorrect as I am not a lawyer.

Thank you.

I'm slightly amused that my parent post is being downvoted yet no one is willing to respond to the reasoning I've presented.

I think HN really needs to track downvotes if only because it is intellectual cowardice to try to bury a dissenting voice without explaining why.

There isn't really a counter to your argument. I wonder if some of the downvotes are from people who might feel a tad guilty about having conducted what is effectively tax evasion.

Well, I hope that isn't the reason. I'd like to think people don't intentionally engage in tax evasion.

^this

A Delaware incorporation is almost never the correct choice for a business unless it has very specific reasons for incorporating in Delaware rather than the state in which it is actually located. The use of Delaware as the incorporation jurisdiction creates a significant amount of duplicative legal compliance costs, a substantial amount of additional tax compliance costs, and frequently makes a startup business ineligible for various startup incentives offered by the state in which it is actually located.

Incorporating in Delaware is an appropriate choice if you intend to have a lot of investors, operate nationally very early on in the life of the business, or definitely plan to IPO. Otherwise, it's simply not worth it. (And note--reincorporating in Delaware is a tax-free reorganization from a US federal tax perspective, so it's not very expensive to reincorporate later in Delaware if necessary.)

So you're saying that incorporating in Delaware is premature generalization?

yea, go delware when it warrants it.

In your profile you claim to be a lawyer (although misspelling "your" makes me wonder), so I'll assume this is true for your typical clients, whoever they might be.

But for folks in the YC orbit, I believe a Delaware corp is almost always the right choice. Getting investment in Silicon Valley has a bunch of common defaults, and sticking with those defaults means fewer bumps and less to explain. Unless a startup has a very strong reason to do something else, or unless they are sure they don't want VC investment, it's to their advantage to just do the standard thing.

As evidence, I'll offer YC's own words: "We require companies to be Delaware corporations as a condition of funding—which any startup should be anyway." [1]

[1] http://ycombinator.com/documents/

The form of incorporation is more important than the state. Delaware is NOT necessary unless your exit is IPO, or when you have a large or diverse shareholder base. YC mostly funds and promotes "BIG" ideas which get MILLIONS of $$ and if your idea is good and will attract AirBNB type money... yes Delaware is a good choice. For average startup it's a waste of money and liability.

That's fine. What that means to me is that YC requires a potential alum to be incorporated in at least two states--Delaware plus California. Incorporating in Delaware, but not California, and then going through the YC process of living, working, and employing people for the purpose of conducting business for 3-6 months in California almost certainly (but not necessarily) is tantamount to operating the business illegally in California.

Your ignoring a hugely important detail here...

YC is giving 6 figures worth of investment and as an investor wants a Delaware corporation. So they are paying you to play by their rules, which is very reasonable since they are covering the associated costs.

Yes, if you want money from people who require you incorporate in Delaware to get it, its the right choice. Just like if you want money from people who require you to do the chicken dance while dressed up like Santa Clause.

Even so, when you need it, you'll have a more resources to do it then when you are starting -- so why expend extra resources at the outset?

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