Why Do Companies Incorporate in Delaware?

By David Carnes

You may incorporate in any state, regardless of where your company does business or where its principal business office is located. Many companies choose to incorporate in Delaware because the state offers certain advantages to its corporations. In fact, the Delaware Division of Corporations states that more than half of the nation's Fortune 500 corporations are incorporated in Delaware.

Corporation-Friendly Legal System

State corporate law typically places many restrictions on the structure of the corporation and the procedures it must follow. A state may, for example, require boards of directors to be of a certain size or require the corporation to submit certain decisions to shareholders rather than allowing the board of directors to make them. Although Delaware law is not completely free of these restrictions, it is far more flexible than the corporate law of most states when it comes to allowing its corporations to choose its own structure and operational procedures. For example, it allows shareholders to shield directors from personal liability for their actions by inserting appropriate language in corporate bylaws.

Experienced Jurists

In the event of litigation, a Delaware corporation need not face a hostile jury with little understanding of corporate law. Corporate law issues are handled by the Court of Chancery, with a judge rather than juries deciding cases. Generally, judges rule on many different areas of law and have various degrees of expertise in these different areas. As a consequence of the large number of corporations incorporated in Delaware, however, Delaware judges have gained unprecedented experience in dealing with issues of corporate law.

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Published Legal Opinions

Courts in common law nations like the United States rely heavily on precedent established in prior cases. This can make it difficult to know exactly what the law is or to predict how to comply with it. State also only publish written court decisions when the case is resolved by a judge rather than a jury. Since Delaware corporate litigation is all resolved by judges, all court decisions are published together with the judge's reasoning and commentary, allowing corporate counsel to gain a clear understanding of the state of the law. This legal transparency can help a corporation avoid litigation in the first place.

Cost

As of the time of publication, the fee to incorporate in Delaware can be as low as $89, depending on the dollar value of the shares issued by the corporation. Delaware corporations must also pay an annual franchise tax of as low as $125, depending on the dollar value of the corporation. Both of these fees are among the lowest in the nation. Large corporations, however, can expect to pay considerably more.

Confidentiality

Delaware corporations need not list the names of their officers and directors in their incorporation documents. This prevents executive search firms (also known as "headhunters") from raiding the corporation for talent and provides officers and directors with the option to keep their affiliation with the corporation private.

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Principal Place of Business vs. State of Corporation

References

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