CT Corporation: Registered Agent of the Fortune 500
State laws require business entities to have a registered agent with a physical presence in the state. The registered agent acts as a liaison between the business and state regulators and receives “service of process” (i.e., notification in the event that legal action has been taken against the business). CT Corporation is America’s largest registered agent. Its Delaware office serves in that capacity for over two-thirds of Fortune 500 companies. It goes without saying that large corporations are saving billions of dollars in taxes by making Delaware their domicile.
One Address to Register Them All
Imagine for a moment that you needed to notify Alphabet, Amazon, Apple, and Facebook of some legal action to which they were parties. You might be surprised to discover that your four quite separate pieces of correspondence will all have the same addressee: CT Corporation at 1209 N Orange St., Wilmington, Delaware, 19801. CT Corporation, also known as Corporation Trust Center, has been a leading provider of registered agent services since 1892 when it was founded as Corporation Trust Company. In 1995, it was acquired by Wolters Kluwer, under whose umbrella it has risen to its present position as the premier registered agent in the US.
Wolters Kluwer is a multinational business services company with global headquarters in the Dutch city of Alphen aan den Rijn. The company traces its origins back to 1836 when J.B. Wolters founded the Schoolbook publishing house. It took the name Wolters Kluwer in 1987, after merging with Kluwer, another publishing house, to stave off a hostile takeover bid by the giant publisher Elsevier. Its acquisition of The Corporation Trust Company (CT) marked the company’s entry into the registered agent services market.
CT Corporation’s Delaware office is housed in a nondescript building. The undistinguished facade belies the company’s position at the center of the registered agent services universe. CT Corporation counts some of America’s largest corporations as its clients. The list includes American Airlines, Bank of America, Berkshire Hathaway, Coca-Cola, Ford, General Electric, JPMorgan Chase, and Walmart. It serves these giant corporations as their registered agent.
What’s a Registered Agent Anyway?
A registered agent is an individual or entity that is authorized to receive legal documents and official government communications on a business’s behalf. Commercial registered agents may perform a variety of services but their primary role is to receive “service of process” and to forward the documents received to the appropriate person at the principal (i.e., the business that the registered agent represents). The “process” is a summons issued by a court, together with the claimant’s “complaint.” Delivering that summons to a recipient is called “service.” Accordingly, service of process is how a party to legal action is notified of his involvement. The recipient or his legal representative is required to provide an “answer” to the summons, either by appearing in court or filing a written statement.
In general, state laws require a business entity to appoint a registered agent. In Delaware, a corporation or limited liability company (LLC) can act as its own registered agent or appoint another business entity or individual to the role. The registered agent must maintain a physical presence for most of the business day in order to accept correspondence from state authorities, including “service of process.” In addition, the registered agent may provide compliance or other services.
Delaware: Capital of the Corporate World
Presently, around 68% of all Fortune 500 companies are incorporated in Delaware. In 2019, more than a quarter of a million business entities were formed in the state, bringing the total number of legal entities registered in Delaware to nearly 1.5 million. The state now has more companies than people. About two-thirds of that number are limited liability companies (LLCs). The total number of LLCs registered in the First State has now crossed the 1 million mark. The advantages of setting up a business in Delaware are the state’s business-friendly laws, low taxes, and its Court of Chancery, which hears cases without a jury.
Delaware passed its first truly general corporation law in 1899. The merits of the statute were the simple procedure for formation it offered, the imposition of a low corporate tax rate, and the broad powers it gave to corporations. These included perpetual existence, legal standing to sue and be sued, and the capacity to hold real and personal property. The law allowed three or more persons “to establish a corporation for the transaction of any lawful business…” Its provisions made the incorporation process a great deal easier than it had been previously. Up until that time, incorporation required either a special act of the Delaware legislature or “cumbersome and time-consuming” procedures under existing general corporation laws.
An application for incorporation under an 1875 law, for instance, required that two-thirds of the applicants be Delaware citizens. The application was to be submitted to a judge of the Superior Court in the county where the corporation was to have its principal office, but only during a court vacation. At least 30 days before submission, a notice in the newspapers was to be published announcing the application. If approved, a certificate was granted and another notice proclaiming the result published. If after three weeks no one objected, the judge would announce — at the following court term — the existence of the entity and direct its certificate to be filed with the Secretary of State. The Secretary of State’s office would certify and send a copy of the certificate to the appropriate County Recorder’s office. It was only at that point that corporate existence commenced, and a new legal entity was created.
The advantages of the 1899 statute have been retained in later legislation. Ever since, the state’s business laws have been regularly updated. In 2020, amendments to the general corporation law (GCL) included a provision allowing a foreign entity to act as the registered agent for a corporation. Similar provisions in the Limited Liability Company Act (LLCA) and the Delaware Revised Uniform Limited Partnership Act (DRULPA) make it possible for a foreign entity to act as a registered agent for an LLC and a limited partnership.
Read More: Why So Many Companies Choose to Incorporate in Delaware
The Limited Liability Company
The LLC form is becoming increasingly favored because of its many advantages. Over 73% of new business entities that made Delaware their domicile — legal home — chose to set up their businesses as a limited liability company (LLC).
The main reason, perhaps, is that an LLC limits the liability of its owners (members) to the amounts they have invested in the business. The “limited liability” protection is bestowed on the members, not the LLC itself. Limited liability status protects creditors from taking legal action against members to recoup debts incurred by the LLC. Again, forming and running an LLC is easier than setting up and operating a corporation. There is less paperwork and less legal formality to observe. For example, while a corporation is required to have an annual general meeting (AGM) of directors and shareholders, there is no similar statutory requirement for an LLC.
Additionally, for tax purposes, the LLC form is quite flexible. An LLC may be treated as a pass-through entity — sole proprietorship, partnership, or S corporation — for federal and state income tax purposes. Pass-through entities are not subject to income tax. Their income is shared among owners and taxed at the individual level. Alternatively, members may choose to have the LLC taxed as a corporation, which results in income tax being levied at both the entity level and individual owner level.
Fast and Furious
The Delaware Division of Corporations offers expedited services. It takes just a day and an additional fee of $50 to $100 (in addition to the regular filing fees) to set up a corporation. Same day service costs extra: $100 to $200. Impatient filers can pay $500 to jump the queue and get it all done in two hours. Those really in a hurry can pay $1,000 to have their corporation signed, sealed, and delivered in just one hour.
Fees and Taxes
Regular filing fees depend on whether or not the corporation shares have a par value. For a corporation with par value shares, fees are based on initial share capital, starting from a minimum of $89. A corporation with an initial share capital of $100,000 would pay $94; one with capital of $1 million would pay $274. Corporations with no par value shares would pay a great deal more. One that issued 100,000 shares would have to pay $674; one that issued 1 million shares would be charged $5,174. The filing fee to form an LLC is $90.
Delaware has a graduated personal income tax rate ranging from 2.2% to 5.55% on income under $60,000. The maximum income tax rate is 6.60% on income of $60,000 or over. The corporate income tax rate is 8.7% of federal taxable income. Domestic corporations are also subject to an annual franchise tax, which can be paid using the method that results in the lesser cost, either the authorized shares formula or the assumed par value calculation. The minimum franchise tax is $175.
A Special Business Court
The state has a special court that deals with corporate and business entity matters. Established in 1792, the Delaware Court of Chancery conducts bench trials (trials without a jury) on disputes. Its separation from other courts allows speedier resolution of business cases since such cases are not competing for judicial attention in the regular courts.
The Delaware Loophole
Delaware has also earned the dubious distinction of having its name become part of a tax dodge (i.e., the notorious “Delaware loophole”). The tax avoidance scheme allows companies to shift intangible assets to a Delaware subsidiary. Delaware does not tax the income from intangible assets, such as “investments in stocks, bonds, notes and other debt obligations… patents, patent applications, trademarks, trade names and similar types of intangible assets,” provided the subsidiary confines its activities to the management of those intangible assets. The Delaware subsidiary must be a passive investment company (PIC).
Large corporations take advantage of this loophole by charging subsidiaries in high tax states for any benefit derived from the use of the assets held by the PIC. The net result of this maneuver for the parent company is to transfer income from a taxing jurisdiction to a no-tax one. A Bloomberg Tax report reveals that “the world’s biggest corporations — Amazon, eBay, Chevron, Target, Microsoft, and more — avoid millions in ...taxes by creating sham transactions, such as paying themselves to use their own logos…”
Taxes ‘R’ Ours
One well-publicized use of the Delaware loophole involved the Toys “R” Us retail chain. The company set up a Delaware subsidiary — Geoffrey LLC, named after its mascot Geoffrey the Giraffe — to which its retail stores were required to pay royalties for the use of the Toys “R” Us name. The payments were deductible in the states where the stores were located. The result was a substantial reduction in the company’s overall tax liability. In 1993, the authorities in South Carolina sued Toys “R” Us — and won — to stop the practice in that state. However, the court decision would not have affected the company’s ability to use the loophole in other states.
Separate and Combined Tax Reporting
The loophole, however, is getting thinner as more states change their tax laws from “separate reporting” to “combined reporting.” In combined reporting, a parent company and its subsidiaries are treated as one entity for state income tax purposes. The Delaware loophole is only possible when the subsidiary PIC is a Delaware entity, and the parent corporation is domiciled in a state that allows separate reporting. Presently, 17 states have separate reporting systems: Alabama, Arkansas, Delaware, Florida, Georgia, Indiana, Iowa, Louisiana, Maryland, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, and Virginia. Bloomberg Tax reports that legislatures in four of these states — Florida, Maryland, Pennsylvania, and Virginia — are considering the introduction of combined reporting. Two states — Hawaii and New Hampshire — that already require combined reporting want to extend that to cover any foreign operations a company has.
It’s Not Delaware’s Fault
But this tax avoidance strategy is not Delaware’s fault, says one opinion piece. The blame lies with state laws that allow the scheme to work, despite the cost. A 2013 study estimated that states at the short end of the stick lost $6.6 billion to $9.5 billion for the 15 years from 1995 to 2009. States can plug the loophole the same way South Carolina did: by incorporating an “economic nexus” doctrine into their tax codes. They can also implement combined reporting, which will provide an overall view of a company’s entire domestic operations. Their reluctance to do so is very likely due to the desire to appear business-friendly.
As a map from the Center on Budget and Policy Priorities indicates, most states (28) already require combined reporting. The ones that don’t lie mostly in the south. For five other states — Nevada, Ohio, South Dakota, Washington, and Wyoming, the tax reporting regimen is a moot point since these states do not tax corporate income. However, Nevada, Ohio, and Washington do levy a tax on gross receipts. South Dakota and Wyoming have neither a corporate income nor a gross receipts tax. Nonetheless, the trend is toward combined reporting, which means that the Delaware loophole may soon be a thing of the past.
About the Author
Anthony is the owner of Kip Art Gifts, an ecommerce store that specializes in art-inspired jewelry, fashion accessories, and other objects. Previously, he worked as an accountant and financial analyst. He enjoys writing on small business, financial intermediation, and economics. Anthony was educated at Wilson’s School and the London School of Economics and Political Science.
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