Why do so many companies choose the small state of delaware to incorporate?

Because of favorable tax laws. In Delaware, there is no sales tax. Besides, when a company is incorporated in Delaware, but does not operate in the state, it does not have to pay corporate tax; instead, it pays a much smaller franchise tax. Finally, Delaware is particularly attractive to financial companies because it has flexible usury laws (it allows financial corporations to charge higher interest rates than in other states).