According to the Delaware Division of Corporations, about 66.8 percent of all Fortune 500 companies incorporate in Delaware. There must be a reason. What do they know that I don’t?
The state of Delaware is the state of choice among several businesses when it comes to incorporation. The state has the largest number of incorporations from out-of-state companies and publicly traded corporation and has more than 1.3 legal entities incorporated within the state.
Even companies like Bank of America, Coca-Cola and Google call Delaware “home” when it comes to incorporation. With such large numbers, it’s not uncommon to wonder why Delaware is the preferred state for incorporation among so many businesses.
A look into the state’s tax laws and history reveal why:
1. Quick Resolutions
When a legal dispute arises, Delaware makes getting through the proceedings easier than several other states. That’s because companies can opt to use a judge instead of a jury to resolve business matters that require court time. Delaware’s Court of Chancery has judges who specialize in corporate law and only hear cases related to business matters. This makes it easier and faster for judges to make decisions on cases since they have the experience and expertise related to business matters.
2. Flexible Corporation Structure
The way a business is structured can have a major impact on its tax liability. However, Delaware makes incorporating in the state attractive for many businesses because of the flexibility it allows for corporation structure. For instance, the owners, officers and directors of corporations do not require state residency to incorporate in the state. Also, companies can choose to form limited liability companies (LLCs), S-corporations.
Delaware’s Division of Corporations also simplifies the process for incorporating in Delaware by enabling businesses to incorporate online and offers fast turn-around times. For example, businesses can pay for expedited service to incorporate within one hour, two hours or the same or next day.
3. Minimal Taxes
Thanks to Delaware’s business-friendly tax system, the state often sees an influx of hundreds of companies that incorporate there every year. While Delaware does have a state-imposed corporate income tax, Delaware-incorporated businesses do not have to pay these taxes if they do not conduct business in the state. Also, since companies have the flexibility to incorporate as pass-through entities, such as S-Corps and LLCs, these companies can lower their tax liability by passing their losses or income to the shareholders of the company.
Corporations that do not want to divulge information often find a safe haven in Delaware thanks to its privacy laws. For instance, formation documents do not have to list the names of directors or officers for corporations or LLCs. It’s part of why the state is known as one of the largest sources of anonymous companies in the world.
5. Predictable Laws
Since Delaware’s corporate laws are predictable, businesses have a better chance of evaluating the outcome of a case. The predictability of the laws is enacted thanks to the expertise of the Chancery judges and the large amount of cases they hear. This makes it easier for companies to predict the outcome of a legal case should it court proceedings take place.
With so many businesses incorporating in Delaware every year, it’s crucial to assess the reasons why. From flexible business structures to quick resolutions for legal disputes, Delaware continues to be an attractive incorporation option for many companies. Yet, it’s also vital for companies to assess whether incorporating in the state fits their needs by evaluating the advantages and disadvantages of incorporating in the state.