Texas, "DExit," and Where to Incorporate

Is Texas the "New Delaware"? The short answer: Texas is booming, both in actual business and in new formations for businesses located outside of the state. But it is too soon to tell if Texas is the “New Delaware” from a corporate or legal perspective.

Background

Delaware plays an outsized role in corporate America. Despite its size, nearly two-thirds of Fortune 500 companies are Delaware corporations. Many entrepreneurs, investors, and small businesses throughout the United States have elected to form their entities in Delaware. Interestingly, that trend started when New Jersey (after which Delaware had copied NJ's own corporate laws) took a heavy-handed turn against corporations in its law and policy under then-governor Woodrow Wilson. Delaware offered a nearby, legally familiar option for businesses.

Why Delaware? It has a well-developed body of corporate law (both statutory and case law). Its Court of the Chancery (a throwback to the “law v. equity” distinction) is sophisticated and respected nationwide. And, after over a century of leading the way, Delaware has a reputational draw as well.

Are businesses leaving Delaware?

Not exactly. The so-called “DExit” isn’t so much physical relocations out of Delaware, but rather decisions about where to incorporate or organize. Most businesses (especially small and mid-sized ones) choose to incorporate in the state where they are actually located and operate.

But some companies based outside of Delaware are choosing to incorporate or reincorporate in other states, such as Nevada, Wyoming, and increasingly Texas, instead of Delaware. These moves are primarily about corporate law, governance, and litigation considerations, not about moving offices, employees, or operations.

What's driving the Texas trend?

Recent years have seen several high-profile companies file to reincorporate in Texas, fueling discussion the “DExit.” Some of the factors include:

• Major companies shifting their legal domicile to Texas (e.g., Tesla, Coinbase);

• Reforms and processes implemented in Texas aimed at increasing business law predictability;

• Specialized business courts in Texas help resolve corporate disputes more efficiently.

That said, Delaware remains a leading choice due to its deep body of corporate law and well-established legal infrastructure, particularly for companies planning to raise institutional capital or go public.

Why Businesses (Big and Small) are Looking at Texas

Favorable Tax Structure

Texas doesn’t impose a state corporate income tax; instead, most businesses are subject to a franchise tax based on their taxable margin. For many small businesses, this structure can be more advantageous than Delaware’s franchise tax regime.

Lower Formation and Maintenance Costs

Filing and annual compliance costs in Texas tend to be more predictable and often lower than in Delaware (although formation is usually more expensive in Texas, its lack of annual filing fees make up for it, relative to Delaware, within a year). Small or privately held companies may not need the extensive case law and specialized courts that make Delaware attractive.

Business Courts and Legal Developments

Recent reforms in Texas focus on reducing certain shareholder litigation risks and increasing legal certainty. Texas’s emerging business courts aim to offer clearer, more efficient dispute resolution.

Economic Growth and Incentives

Texas’s economy continues to expand across key sectors, and the state offers various incentives for business investment. Texas has increased its role as a major financial center, especially with Dallas as the home of the Texas NYSE and the new Texas Stock Exchange (TXSE). And other costs (for example, labor and real estate) may be lower than other states.

Alignment with Physical Operations

If a business operates primarily within Texas, incorporating there can simplify compliance, avoiding foreign qualification and reduce duplicative registrations and agent costs.

Does the Texas trend matter for small businesses?

It often does. Small or closely-held businesses are increasingly weighing Texas as an option when they don't plan to pursue institutional venture capital, they expect most operations or growth to be local or regional, or they want to minimize administrative complexity and cost.

For many such businesses, Texas's cost and simplicity advantages can outweigh the prestige or legal depth associated with Delaware.

Should I incorporate where my business will operate?

For many small and mid-size companies, this often makes sense, as it avoids foreign qualification and related fees, streamlines tax filings and compliance, simplifies governance, and can enhance credibility with investors and clients.

However, there are a few exceptions. For example, if you plan national or international expansion, or your industry has complex regulatory requirements, Delaware might offer some real benefits.

What about nonprofits?

Nonprofits have similar but distinct considerations:

• State-level governance, reporting, and fundraising requirements differ across states.

• IRS tax-exempt status is federal, but where you incorporate impacts local compliance obligations.

• Nonprofits with donors or programs spread across states may still find value in states with well-developed nonprofit law.

• In many cases, nonprofit founders choose the state where the majority of programs are conducted to simplify compliance.

Other States to Consider Beyond Texas and Delaware

Wyoming

• Strong tax advantages: no corporate or personal income tax and minimal annual fees.

• Enhanced privacy protections for LLC members.

• Useful for small business owners, entrepreneurs, and non-U.S. residents forming LLCs.

Nevada

• No corporate or personal income tax and strong asset protection protections.

• Annual business license and certain commerce taxes apply.

• Can be attractive for specific business models, but cost and registration complexities vary.

Each state offers different benefits depending on your priorities: tax structure, asset protection, administrative simplicity, or growth strategy.

Key Trade-Offs to Keep in Mind

When choosing a state for incorporation, consider:

Legal Sophistication vs. Cost

Delaware’s extensive corporate case law and specialized courts remain advantageous for larger or investor-backed companies, but these benefits come with higher fees and complexity.

Foreign Qualification

If you incorporate in one state but operate in another, you’ll likely need to register as a foreign entity, which adds cost and administrative burden.

Tax Nuances

States with no income tax may still impose other taxes, such as franchise or gross receipts taxes.

Governance and Litigation Risks

Newer or evolving corporate courts may offer less predictability than more established jurisdictions.

Reputation and Signaling

Certain investors and partners still view a Delaware incorporation as a signal of stability and sophistication (whether actual or perceived).

Strategic Questions to Ask Before Deciding

To choose the most suitable state of incorporation, consider:

• Growth Plans: Are you aiming for venture capital, a sale, or long-term private operation?

• Cost Analysis: Compare formation, annual, tax, and foreign qualification costs across states.

• Legal Risk: Evaluate your need for developed corporate jurisprudence versus simplicity.

• Tax Planning: Work with a tax advisor to understand how state law affects your federal and exit planning.

• Nonprofit Needs: For nonprofits, weigh program locations, donor base, and multi-state registration requirements.

Keep in mind that the choice of incorporation state is not always permanent; as your business evolves, reconsidering your strategy can be worthwhile.

Conclusion

While Texas is increasingly on the radar as an alternative to Delaware (including for small and mid-size businesses) it is not universally the best choice. Businesses that value cost efficiency, simplicity, and alignment with physical operations may benefit from Texas incorporation. However, Delaware and other states like Wyoming or Nevada still offer advantages depending on your circumstances and business goals.

If you're considering where to incorporate or whether to re-domesticate your business, a careful legal and financial analysis tailored to your specific situation is essential.