Incorporating a startup: Delaware vs California

Almost every startup founder in Palo Alto faces the same early question: Delaware or California? The short answer for companies that plan to raise venture capital is usually a Delaware corporation that also registers in California. The longer answer depends on the business, the founders and whether outside investors are part of the plan.

This guide covers the main entity types, why Delaware dominates venture financing, what each state charges and the steps that follow incorporation. For city permits and the Palo Alto business registry, see our companion guide to business registration and permits. This page does not repeat it.

The main entity types

Venture investors almost always require a C corporation. Funds do not want pass-through income from their portfolio companies. S corporations cannot have most funds or foreign people as shareholders. Only C corporation stock can qualify for the federal qualified small business stock exclusion, which our equity guide describes.

Why Delaware dominates

Delaware is small, but a large share of US venture-backed companies are incorporated there. The usual reasons:

• Predictable law. Delaware's corporate statute and decades of court decisions answer most governance questions.
• The Court of Chancery. A specialized business court decides corporate disputes without juries.
• Investor familiarity. The NVCA model documents that most rounds start from assume a Delaware corporation. Our term sheet basics describe them.
• Flexibility. Delaware makes it simple to create classes of preferred stock, take board action by written consent and run later financings.

Delaware is not the only option. In 2025 Delaware amended its corporate law after several well-known companies moved their incorporation to Texas or Nevada. Most startups still choose Delaware, but founders now hear more debate about it. A California corporation also works well for many businesses. California's corporate law is detailed. A company that only operates here also avoids paying two states. The trade-off is that some investors will ask the company to convert to Delaware before they invest, which costs time and legal fees.

What Delaware charges

Delaware's Division of Corporations sets out the annual costs for a domestic corporation:

• An annual report and franchise tax are due on or before March 1 each year for the prior year, filed online.
• The annual report fee is $50 for non-exempt corporations.
• The minimum franchise tax is $175 under the authorized shares method and $400 under the assumed par value capital method. The maximum is $200,000 for most companies.
• Missing the deadline brings a $200 penalty plus 1.5 percent interest per month on the tax and penalty.

Startups often authorize millions of shares with a tiny par value. Under the authorized shares method, which Delaware's notices often show by default, that can produce a franchise tax bill in the tens of thousands of dollars. The assumed par value capital method, which uses the company's gross assets and issued shares, usually produces a far smaller number for an early startup. Founders who receive an alarming bill should recalculate with that method before paying. Every Delaware corporation must also keep a registered agent in Delaware, usually a paid service.

California filings for a Delaware company

A Delaware corporation with an office or employees in Palo Alto is doing business in California. It generally must register with the California Secretary of State:

Online filings go through the Secretary of State's bizfile Online system. Since August 1, 2026, online Statement of Information filings require a bizfile user account.

The Franchise Tax Board charges corporations an $800 minimum franchise tax each year. The FTB says newly incorporated or qualified corporations do not owe the minimum tax in their first taxable year. Our registration guide covers the LLC rules too. California also has a rule, Corporations Code Section 2115, that applies some California corporate law to out-of-state private companies whose business and shareholders are mostly in California. Your lawyer will check whether it affects you.

The first weeks after incorporating

Filing the certificate of incorporation is only the start. A typical checklist for a new Delaware startup in Palo Alto:

1. Organize the company. Adopt bylaws, elect directors, appoint officers and approve the first actions by written board consent.
2. Issue founder stock. Founders buy their shares, usually at a tiny price, under stock purchase agreements with vesting.
3. File 83(b) elections. Founders with vesting stock usually file within 30 days of receiving it. Missing the deadline cannot be fixed later.
4. Assign intellectual property. Every founder assigns prior work on the product to the company. Our patents and trademarks guide explains why.
5. Get an EIN. The IRS issues employer identification numbers free online. Beware of sites that charge for it.
6. Open a bank account. Keep company money separate. Our startup banking guide covers the options.
7. Register in California. File the foreign corporation statement and the first Statement of Information.
8. Register with the city. If you have an office in Palo Alto, join the business registry within 30 days.
9. Set up a cap table. Track every share, option and SAFE from day one.

Federal reporting and taxes

A C corporation files a federal corporate income tax return each year, even with no revenue. California requires its own corporate return. Many startups hire an accountant who works with venture-backed companies for both. Founders sometimes ask about the federal beneficial ownership report under the Corporate Transparency Act. In March 2025 FinCEN issued an interim rule that removed the reporting requirement for companies created in the United States and their US owners. Check FinCEN's site for the current rule before you rely on that.

Common mistakes

• Forming an LLC to save money, then paying lawyers to convert it before a seed round.
• Splitting equity evenly without vesting, then losing a co-founder in month six.
• Forgetting California registration and the $800 minimum tax, then owing penalties.
• Paying a huge Delaware franchise tax bill without recalculating.
• Letting a co-founder keep code or patents in their own name.

Most of these are cheap to prevent and expensive to fix. A startup lawyer can handle formation quickly. Our law firms guide lists firms with Palo Alto offices. Accelerators in our accelerators guide often provide standard formation packages for their companies.

Frequently asked questions