Delaware has long been known as one of the most business-friendly states, providing a legal and tax environment that attracts many companies to incorporate there even if they don't physically run their operations in the state. But for the past several years, a trend has emerged: Companies are exiting Delaware and redomesticating their business entities (changing the legal jurisdiction where they are formed) to other states.
This raises some questions:
- Where are companies relocating?
- What's prompting the exodus referred to as "DExit"?
- What should your business clients consider when deciding where to form their LLC s or corporations?
Let's dig into the details so you can brief your valued entrepreneurial clientele on what's transpiring.
To start, the reasons why companies — including big names like SpaceX, Tesla, Dropbox and TripAdvisor — are leaving Delaware include some changes the state has made within its business environment and other states' efforts to create more enticing landscapes for business entities.
1. Court rulings favoring corporate liability. Delaware's Chancery Court has made some high-profile judicial decisions that demonstrate a trend toward enforcing a heightened level of corporate liability, scrutiny of shareholders and stricter governance expectations. For instance, the court ruling of conflicts of interest within Tesla's board of directors and excessive compensation for CEO Elon Musk has rattled top-level executives at other companies, making them wary of potential judicial prejudice against corporate boards and major shareholders.
2. Legislative changes. Several changes, effective on Aug. 1, 2025, may dissuade some companies from forming (or keeping) their entities in Delaware:
- A business's registered agent must have a physical presence. The state no longer allows registered agents to use a virtual office or mail-forwarding service to carry out its service-of-process responsibilities.
- Entities may not use their registered agent's address as their principal place of business. (The only exception is if the entity is acting as its own registered agent.)
- Entities that file certificates of validation or correction to ratify a defective corporate act are not entitled to a refund or reduction of franchise taxes, interest or penalties.
- Entities must disclose the nature of their business on their annual franchise tax reports.
- LLCs, partnerships and limited partnerships must pay all of their annual taxes for the calendar year before filing a statement or certificate of cancellation.
3. Oppressive corporate tax rate. Considering Delaware's corporate tax rate of 8.7% in 2025, some businesses may find it more cost effective to register as a domestic entity in a different state. Tax implications vary depending on a business's specific circumstances, so it's important that companies carefully evaluate the effects.
Attraction to other states
Where are companies moving to and why? A few other states, particularly Texas and Nevada, have become popular choices for various reasons.
Examples of some of the top characteristics entrepreneurs look for when choosing where they will register their entities include:
- Lower formation costs;
- More favorable tax environments;
- Management-friendly corporate laws;
- Stronger liability protections for boards of directors, officers and directors; and,
- Lighter compliance formalities.
The Lone Star State, known not only for its large geographical footprint but also as a magnet for big companies like SpaceX and other tech firms, has a legal system that minimizes judicial interference in business decisions and provides predictable outcomes. Its lower state taxes (no corporate or personal state income tax and no franchise tax for businesses with annualized total revenue under $2,470,000 in tax year 2025) and fees make it economically appealing to businesses.
Texas has codified shareholder protections and limits on director liability, giving corporations more flexibility and comfort managing risk. Additionally, the reduced liability helps prevent plaintiffs from bringing derivative suits or winning large damages against an entity's management, provided there's no breach of fiduciary duty, fraud or unlawful conduct.
In Nevada, meanwhile, the state's codified liability protections and stance that, typically, only pierce the "corporate veil" in instances of fraud or breach of fiduciary duty, provide peace of mind and instill confidence in business owners who want some assurance that their directors', officers' and stockholders' assets are at minimal risk. Also, the fact that Nevada has no state corporate income tax, personal income tax or franchise tax makes it a preferred destination for business entities.
The state also does not levy tax on shares of Nevada corporations. In addition, the state allows companies to secure a higher degree of privacy for their owners (limited public disclosure) and anonymity for their officers and directors.
Delaware's efforts to stop the bleeding
Note that Delaware also made some favorable changes in an effort to attract new businesses and keep those already established there:
- Restriction of shareholders' rights to inspect corporate records (other than core documents like charter, bylaws, financials and board minutes), making it more difficult for them to challenge business management.
- More liability protection for directors, officers and controlling shareholders, exculpating them from monetary damages for duty of care breaches.
- Expanded statutory procedures (safe harbors) to protect fiduciaries (directors, officers and controlling shareholders) from liability in conflicted transactions if proper procedures are used to moderate conflicts of interest.
- Clarified definitions to identify who is considered a "controlling stockholder," "control group" or "disinterested director," all of which help reduce legal ambiguity.
- Expanded acceptance of certificates of correction, allowing entities to more easily nullify or change information in previously filed corporate documents.
- Efforts to implement a fully online business registration system (through the statewide Delaware One Stop portal), to serve as a central hub for forming entities, making changes and registering trade names.
What clients should consider when selecting a home state for their business
It's important to recognize that while companies may typically form or incorporate their business entity in any state, many business owners find it most beneficial to choose their primary location's state as the state of registration (i.e., domestication). This is especially true if they'll be conducting the bulk of their business there. After all, they will be on the hook to fulfill compliance requirements in the entity's domicile state and any state(s) where they are conducting their business.
For example, if a business consultant forms a domestic LLC in Delaware but lives in and does most of their work from Pennsylvania, they must complete a foreign qualification filing in Pennsylvania to get authorization to operate their Delaware-based LLC in Pennsylvania. Therefore, they must comply with all reporting requirements and pay applicable taxes and fees in both states.
So, depending on the circumstances, registering a domestic entity in a state other than the one where a business has its primary physical or economic presence — despite what appears to be a more business-friendly, lower-tax environment — might not be the most administratively efficient or financially sound choice after all.
It's always helpful for business owners and new entrepreneurs to consult with trusted legal and financial professionals to determine not only the most advantageous business structure for their company but also where it makes the most sense to set up their entity. As a trusted advisor who guides your clients in optimizing their tax outcomes, you are well positioned to help them make an informed decision that will give them favorable financial results and peace of mind.
