How Delaware Became the State Where Companies Incorporate
As of 2018, there are over 1.3 million businesses incorporated in the state of Delaware, which is more than the population of the entire state (980,000)! Over 50% of all publicly traded companies are incorporated in Delaware, as are 66.8% of the Fortune 500 and nearly 100% of US startups that have been incorporated over the last 5 years (198,450 in 2017 alone). At only 1,954 square miles (5,060 km2) — making it the second-smallest state in the United States after Rhode Island — how did this tiny blip on the US map become a corporate law powerhouse?
Delaware was the first state to join the union of the 13 original States, and has essentially maintained its currently geographic boundaries since Colonial times. It was named after the Delaware River and before European colonists settled the land, it was home to indigenous tribes (shocker) known as the Unami Lenape, or Delaware, who lived mostly along the coast, and the Nanticoke who occupied much of the southern Delmarva Peninsula.
Delaware was originally settled by the Dutch in 1631 but they were quickly killed in a fight with the native tribes. Then the Swedes moved in and set up New Sweden which was subsequently conquered by the Dutch 17 years later to form New Netherland, which was in turn conquered 9 years later by the British Duke of York who leased the land to William Penn (where Pennsylvania gets its name). Fast forward to the American Revolution and while The Lower Counties of Delaware were reluctant to separate from British ties, they were convinced to separate from both the British and from Pennsylvania and become semi-independent. They were tangentially involved in a few battles including Battle of Brandywine where they captured the city of Philadelphia, but not much fighting happened on their soil.
In 1792 the Delaware Court of Chancery was established to oversee issues related to corporation law and it acted as a separate court in Delaware where there were no juries, only judges who gave decisions. It was a court of equity rather than a court of law. Over time, this court gained significant expertise in corporate matters which led to more cases involving corporate matters being brought to this court which caused a nice flywheel effect.
In the late 19th century, New Jersey was the first state to enact corporate-friendly tax laws in an attempt to attract business from New York, but on March 10th, 1899 Delaware enacted a general incorporation act aimed at attracting even more businesses. The people behind this legislation intended on creating a corporation that would sell services to all of the businesses that would incorporate in Delaware. Pretty smart! Prior to this, forming a corporation required a special act of the state legislature. Afterwards, all you had to do was pay and file articles of incorporation with the state’s Secretary of State.
As more businesses started coming to Delaware for incorporation it made sense to start thinking about tax law. Delaware created a tax system that gives businesses numerous ways to legally minimize their tax bills. For example, if you are incorporated in Delaware but do business in other states you don’t have to pay state corporate income tax to Delaware. There is also the “Delaware loophole” which allows companies to declare certain types of revenue in Delaware rather than in the state where the business actually occurred. Delaware also doesn’t have taxes on profits on royalty payments, trademarks, copyrights, inheritance, VATs, or capital shares or stock transfers.
Delaware offers an extreme amount of flexibility and has also created laws and policies that make it incredibly simple for S-Corps, C-Corps, LLCs, LPs/LLPs, or Statutory Trusts to incorporate, avoid liability, and retain privacy. Delaware’s Department of State has reduced the overhead so much that you can fill out incorporation paperwork in under an hour. They also don’t require much personal identifying information so company officers can maintain privacy, ensure anonymity, and avoid personal liability. In addition, shareholders, directors and officers don’t need to be residents of Delaware and they also allow just one person to be the only director, shareholder and officer of a corporation.
Today almost all investors, regardless of where they are located, are familiar with Delaware corporate law and will pretty much insist on a company incorporating in Delaware. So, if you’re looking to incorporate in 2019, it looks like Delaware has you covered ;)
