Delaware vs Texas Incorporation: Choosing the Right State for Your Startup

Texas has no personal income tax and no traditional corporate income tax. Instead it levies a franchise tax (often called the margin tax) on taxable entities doing business in Texas, and it applies the same way to a Texas corporation and a Delaware corporation registered in Texas.

For reports due in 2026 and 2027, an entity with annualized total revenue at or below $2,650,000 owes no franchise tax (the threshold was $2,470,000 for 2024 and 2025). Above that, the rate is 0.75% of taxable margin, or 0.375% for qualifying retailers and wholesalers. Entities with total revenue up to $20 million can use the EZ computation at 0.331% of apportioned revenue. Reports are due May 15.

Owing no tax does not mean filing nothing. Since 2024 Texas no longer uses the No Tax Due Report, but an entity at or below the threshold still files a Public Information Report (Form 05-102) or an Ownership Information Report (Form 05-167) each year.

Above the no-tax-due threshold, Texas taxes apportioned margin at 0.75% (0.375% for retailers and wholesalers), and margin is the lowest of four figures: 70% of total revenue, total revenue minus cost of goods sold, total revenue minus compensation, or total revenue minus $1 million. The compensation deduction is capped per person ($480,000 for 2026 and 2027 reports). Entities with total revenue of $20 million or less can instead use the EZ computation at 0.331% of apportioned revenue, with no deductions or credits.

Example (hypothetical): a Delaware SaaS company registered in Texas has $4,000,000 of total revenue, all from Texas customers, and $2,200,000 of W-2 compensation with no one above the cap.

• 70% of revenue: $2,800,000.
• Revenue minus $1 million: $3,000,000.
• Revenue minus compensation: $1,800,000.

The lowest figure is $1,800,000, so the tax is 0.75% x $1,800,000 = $13,500. The EZ computation would be 0.331% x $4,000,000 = $13,240, slightly lower, so this company should compare both each year. If only half its receipts were from Texas, both figures would roughly halve. None of this depends on whether the company is a Texas or Delaware corporation.

Texas has spent the last two years trying to compete with Delaware on corporate law. The Texas Business Court, created by legislation in 2023, began hearing cases on September 1, 2024, with divisions in Austin, Dallas, Fort Worth, Houston and San Antonio. It handles governance disputes and large commercial cases before judges rather than general civil dockets.

In May 2025 Texas enacted SB 29, which amended the Texas Business Organizations Code. Among other changes, it codified the business judgment rule for corporations and let public companies (and corporations with 500 or more shareholders) that opt in set an ownership threshold of up to 3% before a shareholder can bring a derivative suit.

These changes are real, but they are aimed mainly at public companies and controlling shareholders. The Business Court is young and has a small body of published decisions compared with the Delaware Court of Chancery.

Venture-track startups in Austin, Dallas and Houston still incorporate in Delaware for the same reasons startups everywhere do. The Delaware General Corporation Law is the statute every venture lawyer knows, the NVCA model documents and the Y Combinator SAFE are drafted for Delaware corporations, and Delaware courts have decades of precedent on fiduciary duties, preferred stock and mergers.

A fund can invest in a Texas corporation, but its counsel will have to adapt documents and diligence to the TBOC, and many will simply ask you to reincorporate in Delaware before the round. Delaware has also updated its own law: SB 21, enacted in March 2025, added statutory safe harbors for controlling-stockholder transactions (DGCL §144) and narrowed books-and-records demands (§220).

Until Texas law and the Business Court build a longer track record with private venture-backed companies, the friction of a non-Delaware entity usually outweighs the fee savings.

Using state fees checked October 2026, a Delaware corporation registered in Texas pays more up front and every year than a Texas corporation.

• Delaware certificate of incorporation: $109 minimum (Delaware fee schedule revised August 1, 2026).
• Texas foreign registration (Form 301): $750, one time. A foreign entity that does business in Texas for more than 90 days without registering owes a late fee equal to the registration fee for each year.
• Delaware annual report fee $50 plus franchise tax, at least $175 (Authorized Shares Method) or $400 (Assumed Par Value Capital Method), due March 1.
• A Delaware registered agent every year, plus a Texas registered agent.
• Texas certificate of formation for a Texas corporation (Form 201): $300.

For example, a Delaware corporation that files under the Assumed Par Value Capital Method and pays the $400 minimum spends about $1,309 in state fees through its first Delaware annual report ($109 + $750 + $400 franchise tax + $50 report fee, before agent fees). A Texas corporation pays $300. After year one, the recurring gap is the Delaware franchise tax, report fee and agent. For a funded startup that difference is small. For a bootstrapped Texas business it adds up, and a Texas corporation is a sensible choice.

A Texas resident who owns a Delaware C-corp pays no state income tax on salary, dividends or capital gains, and the company owes no Texas franchise tax until revenue passes the threshold. The incorporation state has nothing to do with this; your residence and where the company does business drive it.

On an exit, the federal Qualified Small Business Stock exclusion under IRC §1202 can remove much or all of the federal gain. For stock issued after July 4, 2025, the One Big Beautiful Bill Act (P.L. 119-21) allows a 50% exclusion after three years, 75% after four and 100% after five, with a per-issuer cap of the greater of $15 million or 10 times basis and a $75 million gross-asset test. Stock issued on or before July 4, 2025 keeps the old rules: a five-year hold and a $10 million cap. With no Texas income tax, a qualifying Texas founder may owe nothing at the state level either.

Compare a California resident: California does not conform to §1202 and taxes the same gain at rates up to 13.3%. If you are deciding between Austin and San Francisco, that difference matters far more than Delaware versus Texas incorporation.

If you are building a venture-track startup in Texas, incorporate in Delaware and register in Texas within 90 days of starting business there. Budget for the $750 Texas registration and Delaware's annual franchise tax, and file the Delaware return under the Assumed Par Value Capital Method.

If you are building a bootstrapped software business, a services firm or a franchise that will never sell preferred stock to a fund, incorporate in Texas. You pay $300 to form, file your Public Information Report each May and owe no franchise tax until revenue passes $2.65 million.

If you are unsure, start in Delaware. Reincorporating from Texas to Delaware later means legal work, stockholder approvals and a fresh review of equity grants, usually in the middle of a financing. This is general information, not tax advice for your specific facts.