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Incorporate in Delaware

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There is a very good reason why over half of the Fortune 500 companies choose to incorporate in Delaware. The tiny state of Delaware is fast becoming renown as a business haven for mid to large corporations looking for a business-friendly environment, with courts and systems that understand the sometimes-complicated corporate world. A large part of the attraction to this state is the fact that the state charges no corporate income tax on companies not operating within the state, though all Delaware corporations must pay an annual corporate franchise tax. Delaware’s laws (i.e. the Delaware General Corporation Law) were designed to allow maximum flexibility to corporate structures and operations. Incorporating in Delaware offers shareholders protection from business debts and lawsuits, potential taxation benefits, increased confidentiality, and greatly increased business flexibility. While there are a number of factors that must be considered before deciding that Delaware is the state best suited for your corporation, if these factors are applicable to you and your business, then incorporating in Delaware can offer a substantial advantage to you and your company.

Factors to Consider

Deciding to incorporate in Delaware should be based on how large you expect your business to grow, what type of business you intend to operate, and what the business goals are for your company. While a haven because of its corporate and business-savvy court system, there are not necessarily any extraordinary taxation benefits offered by incorporating in Delaware. The usual corporate protections are there, in that a Delaware corporation will shield shareholders from personal liability for debts, protection from lawsuits, and offer a certain level of confidentiality. Still, these protections are not automatic and depend upon the corporation being properly operated and the corporate formalities observed.

Business Knowledgeable Courts

One of the primary reasons that Delaware is considered a business haven is because of the understanding that their court system is very sophisticated in its understanding and treatment of corporations. The courts in that state are generally regarded as more experienced in the application of corporate law than those of other states, mainly a by-product of the sheer number of companies incorporated there. Disputes over the internal affairs of Delaware corporations are frequently filed in the Court of Chancery, which is one of the last separate courts of equity (as opposed to “law”) in any U.S. state. Being a court of equity, there are no juries, and its cases are decided by the judges (or “Chancellors”) of the Court. These chancellors tend to know the “ins and outs” of the complicated corporate transactions and meanderings and hence render sophisticated judgments on issues that may baffle ordinary civil courts. Because the Court of Chancery cannot award money damages, Delaware's Superior Court, the trial court of general jurisdiction, also hears and considers a large number of cases between corporations involving claims for money. Finally, due to the number of corporations which choose to incorporate in Delaware, the Federal Bankruptcy court in that state handles many high-profile insolvency matters, and the United States district court for the district of Delaware considers many patent disputes between Delaware corporations.

Usury Laws

In the 1980s, then-Delaware Governor Pierre Samuel du Pont IV shepherded the Financial Center Development Act through the Delaware General Assembly. The act was instrumental in eliminating virtually all usury laws in Delaware, giving banks an immediate incentive to start credit-card subsidiaries in Delaware, as Federal law provides that usury limitations, or lack thereof, are limited to those of a bank's home state, irrespective of where the bank conducts business. This encouraged an explosion in competition among banks to issue credit cards with varying rates for various levels of consumer credit. And because of Delaware’s minimal regulation of interest rates charged, banks were able to issue high-interest rate cards to high-risk consumers.

Advantages of Incorporating in Delaware

Asset Protection from Liability. Incorporating in Delaware offers protection for Officers and Directors from personal liability against any lawsuits or business debts arising from the operation of the corporation or by actions committed on behalf of the corporation. The extent of liability exposure is limited to the amount of initial investment.
Confidentiality. Only the director and the resident agents are disclosed as a matter of public record in Delaware. Stockholders’ names are not a matter of public record. Further, depending on the type of formation (LLC, etc.), a corporation can hold shares of stock.
Stock Flexibility. Delaware corporations may sell, transfer, gift, or purchase shares of it’s own corporate stock. A corporation may issue stock for cash, property and services. Directors can determine the worth or value of the stock, and the stock can be in any quantifiable form: property, capital value, liquid funds, etc.
Credibility. Incorporating in Delaware will increase the “credibility” of your company, and will increase the amount of investor interest in your company. It speaks of “serious business” when your company is incorporated.
Business and Corporation knowledgeable court systems.
Banking-friendly Usury laws.
Tax Advantages. Delaware charges no corporate income tax on companies not operating within the state, though all Delaware corporations must pay an annual corporate franchise tax.

It should be apparent that incorporating in Delaware can offer a tremendous business advantage to your company, especially if you intend to operate out of state or in other jurisdictions. Potential investors are attracted to the security and asset protection implied by the business-savvy court systems and general corporation-friendly laws in Delaware, and the state offers a tremendous amount of benefits in the form of protection from liability, asset protection, taxation, and business flexibility. Incorporating in Delaware will go a long way in making your company more credible in business and in investment-sourcing.