Why Corporations Like to Incorporate in Delaware
Last Updated: By TRUiC Team
Corporations like to incorporate in Delaware for two main reasons: Delaware is known to have the most modern, up-to-date corporate statute, and it has the corporation-friendly Court of Chancery. There are other advantages of incorporating in Delaware; however, there are a few disadvantages as well.
Recommended: Learn how to start and run a corporation with our Delaware corporation guide.
Advantages of Incorporating in Delaware
Companies from around the US and even the world have incorporated in Delaware, which has developed a reputation as arguably the most business-friendly of all the US states.
In fact, the Delaware Division of Corporations says more than 67% of Fortune 500 companies have chosen to incorporate in Delaware, and 1.5 million corporations are registered there. One result is that this tiny state of fewer than 1 million residents earns a significant percentage of its revenue from various corporate activities.
Below are some reasons why companies find Delaware so attractive.
Court of Chancery
The State of Delaware has a unique court called the Court of Chancery that is composed of judges who are well-versed in corporate law, rather than juries consisting of lay people who probably aren’t. Both parties in the state’s legislature are committed to appointing highly qualified judges to this court, and it is considered an honor to serve there.
The upshot is that business disputes before the Court of Chancery are heard and resolved quickly based on a lengthy and well-established body of Delaware law that makes outcomes more predictable. This cuts down on litigation because everyone knows how many potential disputes are likely to turn out.
Although some other states have established similar courts whose sole purpose is to adjudicate business disputes, they lack Delaware’s massive body of corporate law in this area. Thus, because predictability is so important to the business community, including in corporate law – Delaware retains an advantage.
Modern Corporate Statute
Along the same lines, the State of Delaware has a modern and up-to-date corporate statute. Companies find this highly attractive because it makes the rules clear.
Of course, some other states have tried to emulate Delaware’s corporate statute with varying degrees of success. However, Delaware law remains the gold standard.
There are additional advantages to incorporating in Delaware. They include:
- Geographic flexibility: There’s no requirement to live in Delaware to incorporate in the state. You don’t even need a physical address there as long as you have a Delaware registered agent.
- Tax savings: There are tax advantages to incorporating in the state of Delaware. For example, there’s no corporate income tax as long as your company doesn’t do business in the state. Moreover, shareholders aren’t taxed on their shares if they don’t live there. There’s also no sales tax, value-added tax, personal property tax, or inheritance tax.
- Efficiency: Delaware makes an effort to process corporate filings quickly – usually on the same day you file them. The incorporation process often takes less than an hour.
- Privacy: Directors and officers of corporations registered in Delaware can remain anonymous. Likewise, members and managers of LLCs don’t have to disclose their names and addresses to the state.
- Ease of raising capital: Delaware corporations are attractive to venture capitalists and various types of investors. Moreover, a board of directors can set a corporation’s stock price.
- Simplified corporate structure: Delaware corporations can have one person serve as officer, director, and shareholder. This is convenient for very small businesses that may not have other personnel to fill these roles.
Disadvantages of Incorporating in Delaware
Even though there are a lot of reasons to incorporate in the state of Delaware, it isn’t the best choice for every business.
First, generally speaking, it’s often best to incorporate in your home state where you’re most familiar with the laws and where you’re closer to your customers or clients.
Other disadvantages of incorporating in Delaware (unless you’re a resident of the state) include:
- Delaware charges higher filing fees than many other states.
- Any tax savings might be smaller than you think because you will still have to pay your own state’s business taxes. You will also have to pay Delaware’s franchise tax, which is based on the value of a company’s shares. This may be a relatively minor expense if you have a small business, but your stock value will (hopefully) grow with your company.
- You need to hire a registered agent in Delaware. In fact, CT Corporation (1209 N. Orange St. in Wilmington) serves as the registered agent for about 300,000 corporations around the world.
- Your company will have filing, licensing, and annual report requirements that you need to meet along with corresponding requirements in Delaware (and any other state in which you do business).
- If your company is taken to court, cases will be heard in Delaware. That means hiring a Delaware attorney and traveling there for court hearings.