By: Dennis Scoggin
When people think of Delaware … let’s face it, people don’t think of Delaware. But it is the business world’s best-kept secret. About 65% of Fortune 500 companies are incorporated in Delaware (e.g., Amazon, Google, Tesla, etc.). This is no mere fluke. The state boasts a business-friendly climate and extensive body of corporate law. And here’s the kicker: no corporate income tax. Setting up a company in Delaware is so streamlined, that it is home to more than 1.8 million companies—more than the number of Delaware residents! Which is surprising, considering the state has no sales tax, investment income taxes, inheritance taxes, or personal property taxes. A nondescript office building that spans less than a city block in Wilmington, Delaware, is the official incorporation address of more than 285,000 global companies! Notably, you do not have to live in Delaware to incorporate a company in Delaware. Also, a Delaware physical address is not required as long as you retain a Delaware registered agent for your Delaware corporation or LLC.
Predictable legal landscape
The predictability of the Delaware court system is a boon for companies—business issues are predictable because of the Delaware Court of Chancery. This forum is the nation’s preeminent corporate court. It is responsible for developing the case law on corporate matters because its judges are experts in corporate law (no juries in this court!). The Court of Chancery handles matters in equity, and focuses on corporate issues, trusts, estates, other fiduciary matters, disputes involving the purchase of land and questions of title to real estate, as well as commercial and contractual matters. The average civil lawsuit can span several years, but with judges who specialize in corporate law and the lack of juries, along with primacy of corporate-related cases, means that similar cases can be decided swiftly.
Taxes schmaxes
Delaware is considered a tax haven because of its unparalleled tax savings. If your company is incorporated in Delaware, but you conduct business out of state, there is no state income tax. There is also no inheritance tax on stock held by non-Delaware residents. Additionally, there is no state sales tax on intangible personal property (like royalty payments). Also, non-residents who own shares of stock in Delaware corporations are not subject to Delaware taxes. Some companies, however, avoid their in-state income tax by establishing subsidiary or shell companies that hold various intangible assets but do not directly run business operations.
Anonymity & expediency
Did you know that you can conduct same-day business filings in Delaware? The incorporation process can take less than an hour! You can find filing forms and fees here. If you plan on creating an LLC, there is no requirement to make the names and addresses of your LLC’s members and/or managers a matter of public record. As a Delaware registered agent, you would only need to reveal this information: (1) in the event of a legal proceeding; or (2) at the request of law enforcement. Officers, directors, and shareholders do not need to be Delaware residents. Further, small businesses are allowed to have just one person hold the role of officer, director, and shareholder. When it comes to raising capital, whether via angel investors or venture capital, they often prefer you incorporate in Delaware because they are familiar with its business laws.
Considerations
Size matters. Small businesses do not get significant tax savings—you do not get to avoid taxes outright. Delaware does not tax companies incorporated in the state that do not do business there, but you are still responsible for taxes imposed by your home state. Your company will also have to pay the Delaware franchise tax on its shares’ value, but this could be minimal compared to the income taxes your home state may charge. Albeit minimal for small businesses, franchise taxes are subject to increases based on the number of shares and improved value. You may also need to pay a franchise tax in your home state. If you plan on conducting business in another state, you still need to satisfy your state’s filing and licensing requirements for conducting business there (Delaware registered agent fees may vary). If your company is involved in a lawsuit, you will need to travel to Delaware to handle any legal disputes. You will also have to account for legal fees to retain a Delaware attorney to maneuver the legal landscape.
Key Takeaway
In sum, the key advantages to incorporating in Delaware are tax benefits, privacy, expediency, simplified structure, and predictability in corporate law. Delaware offers convenience to companies who incorporate within the state, but said benefits are primarily geared towards large corporations. If you have a small business, you should carefully weigh the additional costs involved against the benefits of incorporating in Delaware. But if you structure your company properly, you will reap the privileges of being a Delaware corporation.
This post has been reproduced and updated with the author’s permission. It was originally authored on February 1, 2023 and can be found here.
Dennis Scoggin, at the time of this post, is a third-year law student at Penn State Dickinson Law. Upon graduation, Dennis will work as a judicial clerk for the Delaware Court of Chancery.
Sources:
https://corp.delaware.gov/
https://courts.delaware.gov/forms/download.aspx?id=135828
https://www.forbes.com/advisor/business/incorporating-in-delaware/
https://www.delawareinc.com/before-forming-your-company/benefits-of-incorporating-in-delaware/?campaign
https://www.legalnature.com/guides/top-3-best-states-to-start-and-incorporate-a-business
https://www.legalzoom.com/articles/incorporating-in-delaware-advantages-and-disadvantages
https://sunlightfoundation.com/2016/04/06/why-are-there-so-many-anonymous-corporations-in-delaware/