The State of Delaware is home to more than 1.5 million legal entities and two-thirds of Fortune 500 companies — sort of. We examine why Apple, Walmart, Starbucks & others incorporate in Delaware.
Delaware may be one of the smallest states in the U.S. But in the corporate world, it’s also one of the mightiest.
Today, Delaware is arguably the most desirable location for incorporation. In fact, there are more than 1.5 million legal entities incorporated in Delaware – including two-thirds of Fortune 500 companies. So while corporate giants (and household names) including Apple, Walmart, Starbucks, and Nike may have headquarters, workforces, and operations in other parts of the country, they all have Delaware listed on their corporate registration documents.
What is it that makes Delaware such a hot spot for businesses seeking incorporation? Let’s explore.
What is the Delaware General Corporation Law?
The best way to understand the Delaware General Corporation Law is to start with a brief history lesson.
Early in the 19th century, every company in the United States had to be incorporated (in other words, formed into a legal corporation) in the state in which they did business. A company operating in Indiana had no choice but to incorporate in Indiana. When they did, they were required to follow Indiana’s laws and tax code.
But later that century, that changed. In 1891, New Jersey adopted a generous corporate tax law, written specifically to favor businesses. The law allowed companies operating in other states to incorporate in New Jersey – and to save on taxes and enjoy other perks for doing so. This was wildly successful for the state, allowing it to earn enough tax revenue that it could pay off its entire state debt.
It’s probably not surprising that other states followed suit by offering their own, similar tax practices to get businesses to stay. Delaware was one of them. In 1899, the Delaware General Corporation Law was adopted, which allowed businesses to incorporate in the state – and enjoy the benefits of doing so.
In the century since then, many states have dialed back a bit on their corporate leniency – but not Delaware. This law has been paramount to making Delaware the business-friendly state that it is today.
What is it About Delaware That’s So Appealing to Corporations?
Many assume the top reason businesses decide to incorporate in Delaware is for the tax benefits. For corporations, this is certainly an upside. For starters, Delaware has no:
- State corporate income tax
- Sales tax
- Tax on interest
What’s more, intangible assets (trademarks, copyrights, and naming rights, among others) aren’t taxable. As such, companies will occasionally move these intangible parts of their business to Delaware – and then pay their own Delaware-based subsidiary for the rights to use the assets. Known as the “Delaware loophole,” this can save a corporation a significant amount of money on both sides. Because these assets aren’t taxable in Delaware, the company doesn’t pay taxes on the money it receives. Plus, the money it pays for the assets can be written off – which can significantly reduce tax liability in its home state.
However, there are other, arguably more important reasons companies opt to incorporate in Delaware. One is ease and flexibility. The incorporation process in Delaware is relatively easy – and companies aren’t required to disclose the names of officers and directors. In fact, retired senator Carl Levin has said it’s easier to incorporate in Delaware than to get a driver’s license.
In addition, businesses incorporated in Delaware are beholden to Delaware law, and in general, these laws are advantageous to businesses and their directors. For example, Delaware operates under the “business judgment rule,” which means a director’s decision “will not later be second-guessed by a court if it is undertaken with due care and in good faith.” This gives directors leeway to make decisions that may not necessarily end well – so long as their decisions were made with the best interests of the company in mind.
In addition, because incorporation in Delaware is so common, Delaware corporate law is widely known and understood. In fact, students at just about every law school learn about Delaware corporation law, as well as the decisions of Delaware courts that interpreting the law.
Another key benefit of incorporating in Delaware is the court system. Delaware has a Court of Chancery, which is a court of equity. The court is made up of seven judges who specialize in corporate law and are appointed by the governor. A key way this system is different from other states is that all cases are decided by the Chancellor or Vice Chancellor; there is no jury involved. As such, lengthy processes can be avoided and cases can often be resolved more quickly than a traditional court system. Plus, cases from the Delaware Court of Chancery are appealed directly to the Delaware Supreme Court, which has significant experience in business law.
With Recent Changes to Section 220, Will Delaware Always be a Business-Friendly State?
It’s clear there are many benefits to a business that chooses to incorporate in Delaware. But will this tiny state always hold its position as a top choice for corporations?
The Delaware General Corporation Law is always evolving. Each change has an impact on the businesses incorporated there – for better or worse.
Notably, recent cases have led to changes to Section 220 of the Delaware General Corporation Law, many of which favor stockholders over corporations. Essentially, Section 220 allows shareholders to access a corporation’s books and records for any “proper purpose.” In the recent past, companies had leeway to push back on these requests – especially if it seemed the stockholder was just looking for evidence to base a suit. But recently, Delaware courts have limited the grounds on which a company can flat-out refuse these requests – or provide the minimum.
In addition, “books and records” were traditionally limited to include only formal board records, such as meeting minutes and presentations. But recent court decisions have held that informal communications among board members – such as emails or even text messages – may be considered books and records in certain circumstances.
As such, boards should assume any business-related communication, regardless of channel, may be made available through a stockholder’s records demand. Boards must revisit internal policies to limit informal communication about important matters – and instead opt to centralize communication via a secure board portal.
Sure, there have been recent changes to the Delaware General Corporation Law – with more expected to come. But for the foreseeable future, Delaware will remain a friendly state for corporations.
About The Author
- Adam Wire is a Content Marketing Manager at OnBoard who joined the company in 2021. A Ball State University graduate, Adam worked in various content marketing roles at Angi, USA Football, and Adult & Child Health following a 12-year career in newspapers. His favorite part of the job is problem-solving and helping teammates achieve their goals. He lives in Indianapolis with his wife and two dogs. He’s an avid sports fan and foodie who also enjoys lawn and yard work and running.
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