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Three Primary Reasons Why It’s Good Business Sense to Incorporate in Delaware

  Sanjiv Gupta CPA  Published 
Three Primary Reasons Why It’s Good Business Sense to Incorporate in Delaware

You could lose as much as you could gain when you start a business, even if it’s small.

If you’re the sole owner, not only do you need to invest a lot to launch and keep your business running smoothly. You’re also responsible for any and all of the debts and losses it incurs.

One way US law lets you protect your assets is by incorporating your business.

Whether it’s a sole proprietorship or general partnership, incorporation turns your business into a company that’s formally recognized by the state where you had it incorporated.

Your business then becomes its own legal business structure. It’s now set apart from you, the other founder, or the other founders as a corporation or a limited liability company (LLC). You may legally transact business through it, but you will be held responsible only for your investment. If the business accumulates any debts or liabilities, your personal assets can’t be used to resolve, settle, or satisfy these.

The first and most important step to incorporating your business is choosing where you want to do it. It’s more advantageous in certain states than in others. Among the most advantageous and popular of them all is Delaware.

Getting to Know Delaware

 If you haven’t been to Delaware or you’re unfamiliar with it, it’s unlikely to be in your top-ten list of the places to best start your business or even incorporate, for that matter.

Located in the Mid-Atlantic, bordered to the northeast by New Jersey, Delaware is the second-smallest, sixth-least populous state. In other words, it’s pretty small, and there aren’t that many people here.

For tourists, there are:

  • No less than 14 parks, including the First State National Historical Park
  • Six beach resorts, including the self-billed country's summer capital Rehoboth Beach
  • Several festivals, fairs, and events
  • Three forests
  • Wildlife refuges
  • Historic places, like historic houses and lighthouses
  • Museums

Considering all this, you wouldn’t think it would be ideal to do any other business in Delaware than cater to the visitors who come here during the summer.

But it actually is. Almost a third of the country’s publicly traded companies are incorporated in Delaware. Several of them are Fortune 500 companies, including Google, Apple, Coca-Cola, and Wal-Mart—four of the biggest and most powerful companies in the world. Not only that, many venture capitalists and investment banks prefer Delaware corporations over all of the other states and business types.

3 Main Advantages of Incorporating in Delaware

 So, why is it particularly worthwhile to incorporate in Delaware?

To begin with, Delaware’s laws are remarkably business-friendly.

The most important among them is the Delaware General Corporation Law (DGCL).

This statute is one of the country’s most advanced corporation laws.

Made by experts in the law and safeguarded from influence by special interest groups, the DGCL provides for both predictability and stability in business, greatly helping business owners protect their investment.

But business is dynamic. It can change over time or due to trends or changes in consumers’ behavior or taste. To ensure it can address issues of entrepreneurs as well as stay current, the state’s legislature reviews the DGCL annually.

Apart from being a corporation law and a statute, the DGCL is an enabling statute. It isn’t an elaborate, prescriptive law that companies need to abide by, unlike in most countries.

Instead, it comprises a few requirements to protect investors as well as provides for flexibility for corporations to do business.

Being so makes it one of the country’s most flexible corporation laws.

The state has applied the DCGL’s principles to make prominent statutes for business entities other than corporations.

Having done so, the DCGL is effectively the foundation of the state’s corporation law—making it the state with the most flexible corporation laws.

As crucial as Delaware’s corporation law is to the how convenient and favorable it is to incorporate here, the state couldn’t have had become the preferred state for incorporation by many venture capitalists and investment banks if it weren’t for the Delaware Court of Chancery.

The Delaware Court of Chancery is regarded across the country as its main forum to determine disputes among Delaware corporations and other business entities.

 The Court is made up of one chancellor and four vice-chancellors, who formally judge a wide variety of cases involving commercial litigation, civil rights, real property, trusts, and guardianships.

The current Chancellor is Mr. Andre G. Bouchard. He was sworn in on May 5th of 2014. Before his appointment, he spent almost 30 years in private practice in Wilmington, Delaware. His most recent position was Managing Partner of a corporate and commercial litigation boutique that he founded in 1996. Before establishing his own firm, he served as a corporate litigator in Skadden, Arps, Slate, Meagher & Flom’s office in the state.

Mr. Bouchard grew up here. He graduated from Salesianum School in 1979. He received his Bachelor of Arts (BA) summa cum laude in 1983 from Boston College. He also received the Edward H. Finnegan Award here. In 1986, he received his Juris Doctor (JD) from the Harvard Law School. In 1981, he was selected as a Harry S. Truman Scholar.

Mr. Bouchard previously served as the Judicial Nominating Commission Chairman, the Delaware State Human Relations Commission Chairman, the Board of Directors of the Delaware Health Information Network’s Vice-Chair, and the Board of Trustees of St. Francis Hospital Vice-Chair. He was also a member of various commissions and boards, including the Sentencing and Accountability Commission and the Criminal Justice Council. He is currently an American College of Trial Lawyers fellow and American Law Institute member.

The present four Vice-Chancellors are Mr. J. Travis Laster, Mr. Sam Glasscock III, Mrs. Tamika Montgomery-Reeves, and Mr. Joseph R. Slights III.

Mr. Laster was appointed on October 9th of 2009. Before this, he was one of the founding partners of Abrams & Laster LLP, a corporate law boutique that specializes in high- stakes litigation that involved Delaware corporations and other business entities, as well as advice regarding transactional matters that pose significant litigation risk.

Before establishing Abrams & Laster LLP, Mr. Laster worked as a director in Richards, Layton & Finger PA’s corporate department. Before joining this firm, he worked as a clerk for the Honorable Jane R. Roth of the US Court of Appeals for the 3rd Circuit.

Mr. Laster received his AB (Artium Baccalaureus, which is Latin for Bachelor of Arts) summa cum laude from Princeton. He received both his JD and Master’s Degree (MA) from the University of Virginia. Here he served on the Virginia Law Review, was an Order of the Coif member, and received the Law School Alumni Association Award for Academic Excellence for having the best academic record among his graduating class.

Mr. Laster is currently an American Bar Association, Delaware State Bar Association, and Rodney Inn of Court member.

Mr. Glasscock was appointed in 2011 after he served as a Master in Chancery from 1999 until 2011. He was born in Erie, Pennsylvania and grew up in Lewes, Delaware. He received a BA in History in 1979 from the University of Delaware, a JD in 1983 from Duke University, and an MA in Marine Policy in 1989 from the University of Delaware.

Before being appointed, Mr. Glasscock had worked as a judicial clerk, an associate in the litigation section of Prickett, Jones, Elliott, Kristol & Schnee; a Superior Court special discovery master; and Deputy Attorney General in the Justice Department’s Appeals Unit.

Mrs. Montgomery-Reeves was appointed on November 25th of 2015. Before this, she was a partner in the Wilson Sonsini Goodrich & Rosati’s Wilmington, Delaware office, where she focused on stockholder class action litigation, corporate governance, derivative litigation, navigation of corporate fiduciary duties, and complex commercial litigation. Before becoming so, she practiced with Weil, Gotshal & Manges LLP in New York, in its securities and corporate governance department. Before joining this firm, she clerked for Former Chancellor William B. Chandler III.

Mrs. Montgomery-Reeves received her degree in 2006 from the University of Georgia School of Law. She received a BA in 2003 from the University of Mississippi.

She has received recognition for contributing pro bono to the Prisoners’ Rights Project. She has served as a Court of Chancery Rules Committee member and a Delaware Access to Justice Commission sub-committee member.

Mr. Slights was appointed on March 28th of 2016. Before this, he was a partner in Morris James LLP, a Delaware law firm, where he practiced both corporate and business litigation as well as chaired its Alternative Dispute Resolution practice group.

Before that, Mr. Slights served as a Judge on the state’s Superior Court for twelve years. He was instrumental in the formation of its Complex Commercial Litigation Division. This was just one of his many assignments.

Before his Superior Court appointment, Mr. Slights served as a litigator in Sidney Balick PA as well as Richards, Layton & Finger PA, both of which are Delaware firms.

Mr. Slights received his JD in 1988 from the Washington & Lee University School of Law. He received his BS in Political Science in 1985 from James Madison University.

Mr. Slights is a Delaware Bar Association, American Bar Association, and American Law Institute, member. He is also an American Bar Foundation fellow and the past Richard S. Rodney Inn of Court President.

More than 200 years old, the Court is the country’s oldest business court. Specializing in corporate issues, as well as having vast competence in and great exposure to such issues, there’s arguably no court better to handle your incorporation than it.

To ensure this, the court uses judges instead of juries. If your business gets involved in litigation, the court will assign a judge to preside over your trail, who has a lot of expertise in matters of complex corporate law, so you’re assured that your case will be handled well.

Since the state is the preeminent body in the law, the country’s corporate attorneys are most knowledgeable in Delaware’s business law. Thus, if you incorporate here, you can expect your attorney to know his way around and get through the process efficiently and fairly quickly, as opposed to doing so in the other states.

The third reason why you ought to consider incorporating here is, Delaware is a tax haven.

Also referred to as tax shelters, tax havens are places where the tax is low, or there is no tax at all, and generous tax incentives are offered to the taxpayers who live or do business in these places.

The tax incentives Delaware offers include:

  1. No income tax is required to be paid by nonresidents.
  2. Shares of stock owned by people residing outside of the state aren’t subject to its taxes.
  3. LLC directors, shareholders, managers, officers, and members aren’t required to live in the state.
  4. No state corporate income tax is imposed on the companies that were established in the state but don’t do business here.
  5. While there is a franchise tax for small businesses, it’s relatively low.
  6. There’s no state sales tax to be paid.
  7. The state’s corporations that aren’t actually operating here aren’t required to obtain a business license here.
  8. The requirements for taxation are usually favorable for companies that have intricate capitalization structures or a large number of authorized stock shares.
  9. The state offers greater privacy to the corporations operating here as compared to all of the other states. The owners aren’t required to disclose the names of their officers or directors on the formation documents. This affords a degree of privacy that lets them do business with ease and confidence if needed.

 Last Take-Away

 There’s a lot of risk in starting a business. You’ll have to spend a lot to put it up and run it as well and for as long as possible. It would be wise for you to make use of all the means to protect your available assets, like incorporating.