Delaware's business-friendly history
According to the pamphlet Why Corporations Choose Delaware, more than 50 percent of Fortune 500 companies, and close to one million business entities, have made Delaware their home.
If you want to know why so many corporations choose to set up in Delaware, remember these 3 legislative landmarks:
- The General Corporation Law: Changeable by design, this fine-tuned statue is biased against regulation. Nationwide, it led the way to limiting the liability of corporate directors and officers, providing relief from high-cost insurance. Many provisions also exist to ensure that companies run smoothly. For example, the law permits corporations to easily change structure. If your business needs to become an LLC, limited partnership, or statutory trust, it's easy to make the switch.
- Delaware's Court of Chancery: Established in 1792, this jury-free court boasts a long, written history of decisional corporate law. Former Chief Justice William Rehnquist described the court as one that "allows business planners to order their affairs to avoid lawsuits." The Court of Chancery does not handle tort or criminal cases, which allows it to operate quickly.
- The Division of Corporations: Run by the Delaware Secretary of State's office, this unique government agency actually makes a profit. One reason: It's set up to run much like the businesses it serves. The Division of Corporations provides easy access to online forms and fee schedules. It allows qualified registered agents to view corporate documents, submit filings, print plain or certified documents, and certificates of good standing — all online. Open until midnight, the agency handles one hour, two hour, same day and 24-hour turnarounds for important documents.
Delaware's Court of Chancery has established a habit of allowing corporations and shareholders maximum flexibility, when interpreting the state's General Corporation Law. The court has ruled that even a single, anonymous person can set up a corporation in Delaware. This practice is highly controversial for its lack of transparency.
Because of Delaware's pro-business status, it may be the right state for you to incorporate your business. Before choosing, remember that a business attorney can give you the best guidance for your situation.
Nevada: From 'Wild West' to all business
At the turn of the 21st century, Nevada came in second to Delaware for the number of out-of-state corporations it had chartered. To be clear, the gap was great. Delaware hosted 91 percent, while Nevada was home to 2.66 percent, according to a 2003 article by Bebchuk & Cohen in The Journal of Law & Economics.
Still, Nevada seems poised to interpret its corporate laws to give Delaware a run for its dividends. There are three important ways this state helps companies that incorporate in Nevada:
- Nevada could help protect your company from a hostile takeover. This is one of the main reasons corporations file lawsuits against one another.
- Nevada provides protection for you and your officers against "piercing of the corporate veil." When a court pierces the corporate veil, this means that the corporation's actions are tied back to its controlling officers and shareholders. These individuals can then be held accountable for acts of fraud or liability. As of 2012, the corporate veil was pierced only twice in Nevada.
- Corporate taxes in Nevada are almost non-existent. There's no franchise tax, no corporate income tax, and no personal income tax. There is an annual $200 business license fee.
Remember that Nevada is known for gaming and vice. Depending on the type of organization you want to incorporate, this could factor in to your decision about where to incorporate. Particularly with family and conservative markets, reputation still matters. Talk to a business attorney if you want help deciding whether Nevada is right for your company.
Side-by-side: Delaware incorporation vs. Nevada incorporation
Here are some more details that might help you decide between Delaware and Nevada:
- The minimum cost to establish a Delaware corporation is $89. While the state has no corporate income tax, Delaware's franchise tax runs significantly higher than many states.
- The minimum cost to establish a corporation in Nevada is $400. This cost includes the list of officers and the business license. In Delaware, a business license is not required.
- Neither state requires a company to hold board or business meetings there. Your company's headquarters can be located in any state, but you'll need a registered agent based in your state of choosing to receive any official correspondence.
Delaware and Nevada's corporation laws under scrutiny
Still not sure if it's a better idea to incorporate in your own state, Nevada or Delaware? Keep in mind that many states have created laws to prevent corporations from exploiting loopholes in the two havens.
One New York Times report calls most Delaware companies "empty shells" to help corporations avoid paying taxes in their own state. These "shell companies" are under increased scrutiny at the federal level, as well.
Another Times articles describes, "How Apple sidesteps billions in taxes." In a nutshell: The California tech company uses a Nevada-based subsidiary, Braeburn Capital, to pay less in state income tax, and there are no capital gains on Apple's earnings there.
Ask yourself: Are your business earnings sufficient to warrant incorporating in Delaware or Nevada? Are you planning on going public someday? If so, you may want to consider Delaware or Nevada. But there may be tax incentives in your own state that might make it worth incorporating at home, so do your research before making a decision.
We can help you find a business attorney to help you sort through what's best for your situation. And if you're ready to file, we'll walk you through it. Get started forming your business entity today.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.