Have you ever wondered why there are so many banks headquartered in the state of Delaware? This small state — where I happened to spend four years of my life while at college — is friendly to businesses. For a century, Delaware has boasted friendly tax codes and lax incorporation laws, inviting savvy business owners and international crime syndicates to the state, at least on paper. Half of all the publicly-traded companies in the United States have part of their businesses incorporated in Delaware, the home of tax-free shopping. And there’s nothing more American on this Independence Day as taking advantage of laws designed to reduce taxes.
All you need to form a corporation in Delaware is someone willing to be your company’s registered agent in the state, and there are certainly companies willing to play that role for a fee. That is how one street address in Wilmington, Delaware is the legal home for over 285,000 separate businesses.
The benefits of incorporating in Delaware sound like the state might be an offshore tax haven.
- When you incorporate your business in Delaware, you do not need to list the corporate officers, owners, directors, or any other private individual’s name. When I incorporated my business in New Jersey as a Limited Liability Company (LLC), the business was inextricably linked with my name and my personal identity. Incorporating in Delaware adds a layer of anonymity, which is good for people who prefer to avoid the public eye. I suppose that category might include criminals, fraudsters, or other people who would prefer not to be linked with the type of the business they’re in.
- Delaware offers a very business-friendly legal system. Business jurisdiction is handled by Delaware’s Court of Chancery. Litigation goes to a business-friendly judge, not a jury. Juries can have unpredictable outcomes, but a judge is mostly confined by legal precedent.
- Incorporating in Delaware is cost-effective. Whether your business deals with just $1,000 in sales a month, whether your business earns $50 million a year in global profits, or whether your scheme launders $100,000 a week, the one-time fee to incorporate in Delaware is only $89. Keep in mind you’ll need to pay a company to be your registered agent in the state, however.
- The tax code in Delaware is designed such that some income that would be taxable in other states is not taxable in Delaware.
The friendly business environment in Delaware is stealing business from other states. Pennsylvania and New Jersey are losing millions of dollars in tax revenue because companies that do business that benefits those states are headquartered elsewhere.
Just as the federal government has been making it more difficult for American businesses to take advantage of offshore tax havens like the Cayman Islands, there may come a time when Delaware is restricted from offering these types of benefits. Politicians in Washington have attempted several times to limit these benefits, but have been unsuccessful thus far. The benefits may be irrelevant to most business owners, particularly if the business never becomes a publicly-traded entity. Businesses that start small but begin to grow can always be re-incorporated in Delaware if the owners decide that Delaware’s benefits make financial sense for the company.
Would you be willing to incorporate your business in Delaware just to take advantage of the tax and legal benefits?
Updated January 24, 2017 and originally published July 4, 2012.