Delaware’s General Corporation Law Attracts Nationwide Attention

If you want to start a business, there are few places better to get incorporated than the state of Delaware. While nearby states like New Jersey have jumped on the bandwagon of enacting laws that make it easier for corporations to operate within their borders (in the case of NJ, it was to poach business from NY), they are really just following Delaware’s lead in becoming so-called corporate havens. But Delaware really takes the cake with the General Incorporation Act, adopted in 1899, which set the bar for favorable rules regarding corporations. As a result, it is estimated that more than half of all publicly traded companies in the U.S. (including Fortune 500 companies) go to Delaware to become incorporated.

The end result of Delaware’s early tendency towards helping corporations has been twofold; first, it has allowed big business to thrive, and second, a massive body of case law has been compiled. To begin, a company becomes incorporated in the state of Delaware, but opens business locations in other states. If a corporation doesn’t operate in the state, it pays no income tax to Delaware. Further, it is able to conduct internal affairs in conjunction with lax Delaware standards, regardless of the states it actually operates in, thanks to the internal affairs doctrine that says a corporation is only subject to the laws of the state in which it was incorporated. So far, this sounds great for the corporations, but what’s in it for Delaware?

First of all, the state charges a ridiculously high franchise tax (far more than other states), which brings in about 20% of its annual revenue. Further, it takes full advantage of a federal law that gives the state of incorporation ownership of any property that is abandoned or goes unclaimed (if the owner cannot be found to take possession). This means that buildings, assets, equipment, and even un-cashed checks may go to the state after a statute of limitations has been exceeded and the owner does not come forward. Because Delaware has rewarded corporations that start up in the state with an income-tax loophole, it’s not surprising that it aggressively seeks out these unclaimed properties, even going so far as to perform frequent audits of any corporation that claims Delaware as its legal home.

But there are other reasons why companies might choose Delaware as the state in which to become incorporated. Because it has been in the business of helping business for so long, it has a long history of statutes and case law with which to address corporate disputes. Further, it has a Court of Chancery to specifically deal with the internal affairs of corporations, with judges (or chancellors) hearing cases, rather than juries. These chancellors are well-versed in Delaware’s corporate law and so they often resolve disputes and suits so that they don’t foul up the regular court system (although those unhappy with the ruling may appeal to the Delaware Supreme Court).

Considering that Delaware’s corporate laws basically set the bar for other states and even national corporate law, the prospect of incorporating a business there is fairly attractive. Not only can corporations peruse the laws in order to ensure that they stay within bounds, they will also benefit from the leniency with which these laws govern corporate business. Most other states have far more difficult and restrictive systems to navigate.


Carol Montrose writes for Kellis Law, a law firm specializing in DUI cases with 20 years of jury trial experience.

• ← Delaware Small Businesses – Additional Federal Assistance Now Available to those Economically Impacted by Hurricane Irene
• The Delaware Community Foundation “25 Years Of Caring” With Vice President Joe Biden →