With more than 60% of all the Fortune 500 companies in the United States incorporated in Delaware, and more than 50% of all publicly traded companies incorporated there as well, the question, “Why do so many companies incorporate in Delaware?” might have crossed your mind.
While you were wondering, even more business were making the move—at least on paper. In 2014, 169,000 businesses were formed under the Delaware General Corporation Law—4% higher than the previous record set in 2007. So, while a majority of these corporations have locations outside of Delaware, they still pay annual fees to form an LLC, corporation or limited liability partnership in the state.
But, Again, Why Delaware?
It all comes down to the state’s General Corporation Law (GCL), which was passed in 1899 and modeled after a similar law passed earlier in New Jersey. Before the law’s passing, corporations were created exclusively through special acts of a state’s legislature. Following the GCL’s passing, groups of people were allowed to register a corporation by raising the required capital and filing an application.
This opened the floodgates for entrepreneurs looking to set up their own corporations, and swelled even higher when neighboring New Jersey restricted its version of the GCL. Today, many assume the reason Delaware is so attractive is that it offers tax breaks to corporations. It’s true that the state does have a relatively low franchise tax, but the real reasons that new businesses prefer Delaware are many and varied.
1. The State’s Commitment to New Businesses
There’s a bipartisan consensus in the state legislature to keep Delaware’s corporation laws current, clear and concise. This is especially attractive for businesses that want to operate under laws that clearly spell out what they can and cannot do and leave little to interpretation.
2. The Courts and Lawyers Are Top-Notch
The Court of Chancery is Delaware’s court that focuses solely on corporate issues. Because it is dedicated solely to overseeing Delaware’s corporate law, the court’s officers have a high degree of knowledge, experience and familiarity with corporate disputes.
3. The Court’s Case Law Offers Extensive Precedent for Many Cases
Due to the amount of incorporated businesses in Delaware, chances are that there’s a previous ruling that applies to any dispute brought before the Court of Chancery. This level of precedent can help business owners choose to either settle or litigate, which speeds up the court process.
4. Investors Prefer to Back Delaware Corporations
If you are looking for backing from angel investors or venture capitalists, you might want to seriously consider incorporating in Delaware. Additionally, if you intend to take your company public at a later date, investment bankers are also more supportive of companies incorporated in Delaware.
5. Greater Corporate Privacy Protections
Unlike other states, Delaware does not require officers or directors to be named in formation documents. This layer of anonymity can be very attractive to some new business owners.
6. An Efficient and Client-Friendly Secretary of State’s Office
While the assumption might be that a government office will be mired in bureaucracy and move slowly, Delaware’s Secretary of State’s office has been lauded for its efficiency and service. The office uses a state-of-the-art computer system that is set up to handle customer requests quickly.
7. Attorneys Are Familiar with Delaware’s Corporate Laws
Because it is so unique, law students study Delaware’s corporate law as a matter of course. This means that regardless of where you are located, if you choose to incorporate in Delaware and need legal guidance, you can more than likely find an attorney well-versed in its case law.
8. Favorable Business Tax Laws
While tax breaks aren’t the only reason, they do contribute to Delaware’s popularity among businesses. If a business is formed in Delaware, but doesn’t conduct business there, they are not subject to corporate sales tax. There is also no personal income tax for non-residents, and stock shares that are owned by people who do not live in Delaware are not subject to state taxes.
Choosing where to incorporate your business is an important decision to make. If you’re thinking of incorporating outside of your business’ home state, research and review the Secretary of State’s website, see if you’ll need to file additional paperwork and weigh the pros and cons. Making a wise choice can save you money in the long run and make it easier to take your company public at a later date.
For more information on the benefits of incorporating your business, read expert Nellie Akalp’s article on how to reduce personal liability in your small business.