Dover Soul - Going Public On The Benefits (and Pitfalls) of Incorporating in Delaware

As with most legends, creative imaginations and the passage of time tend to inflate the actual happenings. Apparently, the good General was merely seeking a better jurisdiction whereat to incorporate his substantial farming interests.

New Jersey had been a corporate haven since the late 1800s, as its 1875 Constitution abolished the regulation mandating special charter corporations and opened the door to general charter corporations. Meanwhile, back in Dover, businesses wishing to incorporate in Delaware had to do so via a legislative mandate as they were all considered public corporations. These unfriendly conditions caused most Delaware corporations to incorporate in New Jersey, much to the chagrin of their home state. Corporate presence within a State results in substantial annual filing fees and account for tax revenue.

Soon, the Delaware legislature realized it was losing out on a tremendous business opportunity, and it revised its corporate laws. In fact, legislators essentially offered corporations the identical laws they were enjoying in New Jersey, but with lower taxes and incorporation fees. According to my research this was the first ever instance of “copy and paste”.

By early the next century, Delaware had become a serious threat to New Jersey’s reign as the preferred destination for business founders to incorporate. Legend has it, Delaware’s reputation as capo of corporations was cemented ( see what I did there?) when state representatives extended an invitation to the du Pont family, to re-incorporate the DuPont Company in their home state. The du Ponts agreed to the state’s generous offer of a lifetime supply of horseshoe crabs and soon re-incorporated in Delaware. Thereafter, many other significant American corporations followed.

Around this time, the state of New Jersey passed seven anti-business and anti-trust laws, commonly referred to as the “seven sisters.” Championed by Governor Woodrow Wilson, these laws were supposed to regulate large corporations. As a result, however, it drove corporations to leave New Jersey and re-incorporate, or incorporate for the first time, in Delaware.

As an aside, Professor Wilson of Princeton was not deterred. As President, he later promoted similar laws on a nationwide scale. We all know what happened in the late 20s. Just saying. Not pointing fingers but if the bowtie fits, wear it.

With a newly-adopted statute, the General Corporation Law, Delaware began to serve as the new domicile for corporations. Delaware’s Court of Chancery, the nation’s oldest business court, rose to prominence as the nation’s leading forum for settling corporate disputes.

Delaware has a separate Court of Chancery that hears cases specifically involving corporate issues. As these judges have corporate law backgrounds, cases are decided competently and expeditiously without the utility of juries who are not as experienced. Anyone who has ever served on jury duty on a case involving a ‘slip and fall’ or a ‘hit from the rear’ knows very well most courts lack the sophistication to address corporate espionage, intellectual property and Board disputes.

As the Court’s own website humbly asserts:

The Delaware Court of Chancery is widely recognized as the nation’s preeminent forum for the determination of disputes involving the internal affairs of the thousands upon thousands of Delaware corporations and other business entities through which a vast amount of the world’s commercial affairs is conducted. Its unique competence in and exposure to issues of business law are unmatched.

You got it. Flaunt it. The State even produces a chest pounding booklet on Why You Should Incorporate in Delaware. A few other charming Delawarean perks include:

There is no corporate income tax from Delaware if you do business in another state. There are also no tax royalty payments on other “intangible assets”. Stock shares are not taxed by Delaware if their owners do not reside within the state. Moreover, non-residents pay no personal income tax. Neither are there Delaware taxes on stock shares for non-Delaware residents.

In addition, officer and director names are not necessary on the initial corporate formation documents. This creates a level of anonymity and privacy other States just do not seem to appreciate. As of the foregoing, more than one half of all publicly traded and Fortune 500 companies have incorporated in Delaware.

However, one cannot smell the roses without being careful of the thorns.

The average small business may never notice any of these benefits specific to Delaware. In fact, incorporating in Delaware may result in additional costs and complexity. A registered agent is necessary for purposes of service of process in the event you are not physically located within Delaware. Similarly, Delaware also requires you to file annual reports even if already done so in your home state. Finally, if you conduct business outside Delaware, you will have to register the business in the state(s) wherein you do conduct business.

Decisions. Decisions. You must be relieved to know this captivating article is written by a member of the Shield Advisory Group and they are available to weigh with you the…