Incorporating in Delaware explained: why it's such a popular option for US businesses

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  1. Introduction
  2. Why do so many companies incorporate in Delaware?
    1. Favourable business law
    2. Court of Chancery
    3. Privacy
    4. Tax advantages
    5. Investor comfort
    6. Flexibility
  3. Benefits of incorporating in Delaware
  4. Challenges associated with incorporating in Delaware

Delaware has a reputation as the United States' corporate haven for good reason. More than 1.9 million business entities have made their legal home in Delaware, including over 68% of Fortune 500 companies. And the reason is clear: this small US state is a heavyweight in corporate law. Delaware's advanced and flexible business laws, specialised Court of Chancery and attractive tax advantages make it an appealing choice for many businesses – as does its business environment, which often supports management. Understanding why and how Delaware has become such a magnet for corporations can be a valuable strategic insight for any business based in the US.

But the decision to incorporate in Delaware isn't one that should be taken lightly. Deciding where to incorporate a business can have significant implications for a company's taxes, legal rights and obligations – as well as its appeal to investors. Choosing whether to incorporate in Delaware means examining the specific benefits and potential challenges that Delaware offers and aligning them with the business's needs and goals.

Below is a guide to the key considerations for businesses that are deciding whether or not to incorporate in Delaware.

What's in this article?

  • Why do so many companies incorporate in Delaware?
  • Benefits of incorporating in Delaware
  • Challenges associated with incorporating in Delaware

Why do so many companies incorporate in Delaware?

Incorporating in Delaware offers several advantages. Here are a few of the main reasons why companies choose to incorporate in Delaware:

Favourable business law

Delaware's General Corporation Law is one of the most up-to-date and flexible corporation statutes in the United States. It was written to support the needs of corporations and it is updated continuously to serve that purpose. One of the key aspects of this law is that it favours the rights of management and directors, providing them with substantial flexibility in managing the affairs of the corporation. This offers companies an advantage because it gives leadership more control over the corporation's direction and provides a greater level of protection for the decision-making processes. This can be particularly beneficial in the event of a lawsuit or other legal proceedings, as Delaware law often protects management against liability in ways that other states do not.

Court of Chancery

This unique court system is another feature that makes Delaware an attractive state for incorporation. The Delaware Court of Chancery only hears cases relating to corporate law, making the judges in this court experts in this field. Unlike many other courts, the Court of Chancery doesn't use juries. Instead, judges make every decision, which can lead to more predictable and consistent outcomes. This court is highly respected for its speed and efficiency, which allows corporations to resolve disputes quickly and easily, and continue with their business operations. Moreover, the substantial and well-developed body of case law from this court provides corporations with clear guidance on a wide range of issues.

Privacy

Delaware offers more privacy for corporations than many other US states, which can be a significant advantage. In Delaware, businesses are not required to list the names of directors and officers in the articles of incorporation. This offers those individuals a certain level of anonymity and allows them to conduct business without worrying that their personal information will become public. This level of privacy can also serve as a protective measure against potential legal action, as it can make it more difficult for third parties to obtain information about a corporation's internal structure and leadership.

Tax advantages

Delaware's tax laws are structured in a way that offers corporations several benefits. If a business is formed in Delaware but doesn't conduct business within the state, it isn't required to pay state corporate income tax. This can result in significant savings for companies, particularly those with high revenue. However, businesses should bear in mind that companies are required to pay a franchise tax.

Additionally, Delaware does not impose personal income tax on non-residents. For companies with out-of-state employees or directors, this is another attractive benefit.

Investor comfort

Many investors have a preference – and sometimes a requirement – for the startups they support to incorporate in Delaware. This is due to the state's well-established corporate laws and business-friendly environment. Incorporating in Delaware can make it easier for companies to attract investment, as investors are often more comfortable with investing in a Delaware corporation, due to their familiarity with and confidence in its legal system.

Flexibility

Delaware corporate laws allow for business structures that provide distinct advantages. In Delaware, a single individual can hold all offices in a corporation. This means that one person can be the president, secretary, treasurer and sole director. This simplifies the management structure and allows for a high degree of flexibility, particularly for small businesses.

Benefits of incorporating in Delaware

Incorporating a business in Delaware comes with a variety of benefits that make it an attractive choice for many companies, especially larger corporations or those that want to raise venture capital funding. Here are some of the main benefits:

  • Sophisticated and flexible corporate laws
    Delaware's General Corporation Law is one of the most comprehensive and flexible corporate statutes in the United States. The state legislature updates the laws regularly to reflect the changing needs of modern businesses, ensuring that the state remains a favourable environment for corporations. The laws provide flexibility for companies to manage their affairs as they see fit, while offering directors and officers high levels of protection. This encourages business innovation while maintaining a high level of corporate governance.

  • Specialised corporate court system
    Delaware has a unique Court of Chancery that only handles corporate-law disputes. This court uses judges – not juries – for decisions, who are experts in corporate law. Typically, this system provides faster and more predictable results than in other states, which can save corporations time and money. The Court of Chancery has developed a substantial body of case law over the years, which helps to provide legal certainty for corporations.

  • Corporate privacy
    Delaware offers a significant level of corporate privacy. For instance, when you file your business's annual report, you do not have to name directors or officers. This provides a level of anonymity that is not available in many other states. In addition, Delaware's laws protect the personal information of stockholders.

  • Tax advantages
    Delaware provides several tax benefits. For example, if a corporation operates outside of Delaware, it does not need to pay Delaware corporate income tax. There's also no personal income tax for non-residents and there's no sales tax. Additionally, there is no value-added tax (VAT), no use tax, no inventory tax, and no capital shares or stock transfer taxes.

  • Investor preference
    Many institutional investors prefer, or even require, companies to incorporate in Delaware due to the state's well-established laws and corporate court system. For startups that are trying to raise venture capital, incorporating in Delaware can make it easier to attract investors.

  • Ease of incorporation and corporate maintenance
    Delaware has made the process of incorporating relatively simple, and the state's Division of Corporations is known for its efficiency. Furthermore, Delaware allows for single-person corporations, in which one person can be the sole director and hold all officer positions.

  • Corporate governance
    Delaware's corporate statutes and case law provide comprehensive guidance on matters of corporate governance, offering managers and directors clarity on a range of corporate issues. This extensive framework ensures that corporations have a clear understanding of their responsibilities and the standards they need to uphold.

  • Predominance of corporate attorneys
    Given Delaware's popularity for incorporations, there is a large pool of lawyers who specialise in Delaware corporate law. This means that companies incorporated in Delaware will be able to find experienced legal counsel easily.

Challenges associated with incorporating in Delaware

While incorporating in Delaware offers several major benefits, businesses may also face potential challenges. Here are some of them:

  • Registered agent requirement
    Every company that incorporates in Delaware must have a registered agent with a physical address in the state. This means that if a business isn't physically located in Delaware, it will need to hire a registered agent service, which incurs an additional cost.

  • Dual compliance
    If a company is incorporated in Delaware but operates in another state, it may have to comply with the laws and regulations of both states. It might be considered to be a "foreign" entity operating in its own state, and thus be required to qualify or register as such, which usually involves additional fees and paperwork.

  • Franchise tax
    All corporations in Delaware are subject to an annual franchise tax, even if they don't do business in the state. The amount varies depending on the type and size of the corporation. Some businesses might find the costs associated with the franchise tax to be higher than in other states.

  • Increased legal costs
    The complexity of Delaware's corporate laws, while beneficial in many respects, may also result in higher legal costs. For example, if disputes arise, they'll be settled in Delaware courts, which may involve hiring lawyers who are familiar with Delaware law.

  • Annual reports
    Delaware requires corporations to file an annual report. The report and the associated fees are due by 1 March of each year. This process can be complex and time-consuming for businesses, especially those that are not located in Delaware.

  • Limited benefits for small businesses
    While Delaware's business laws are known for their benefits to large corporations, small businesses may not reap the same rewards. For instance, small businesses are less likely to benefit from the sophisticated case laws of the Delaware Court of Chancery if they are unlikely to be involved in complex legal disputes. In addition, if a small business doesn't plan to attract venture capital or go public, they may not benefit from Delaware's investor-friendly laws.

Before choosing to register in Delaware, it's important to consider the business's unique needs and weigh up the advantages against the potential hurdles. Businesses owners should consider speaking to a legal professional to ensure that incorporating in Delaware aligns with the company's best interests.

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