The state of Delaware is considered the best place in the world to form a business. Here's why, plus tips on how to maintain a Delaware company.
Once again, Delaware’s dominance cannot be denied.
There is simply no better state in which to incorporate a company in the United States than Delaware.
No matter what type of company you’re thinking about forming—corporation, Limited Liability Company or Limited Partnership—Delaware is by far the best state in which to incorporate!
Think we’re exaggerating? Check out this data:
And check out this staggering statistic:
The total number of legal entities formed in Delaware increased to 1,181,000 in 2015, a 38% increase since 2008.
Let’s break it down by types of business entities, shall we? Here are the numbers of new business formations in 2015:
That’s not all, folks.
The general fund revenue collected by the Delaware Division of Corporations in 2015 hit $1 billion for the first time. One. Billion. Dollars.
But wait…there’s more!
There were also several positive changes to Delaware Business Entity Laws, including:
Data doesn’t lie, ladies and gentlemen—Delaware is clearly the conquering hero of all the supposedly corporate-friendly states in the nation.
Over 65% of Fortune 500 companies are incorporated in Delaware. The often-repeated mythology related to the question of “Why?” is two-fold: to pay less in taxes and to file companies without listing an owner’s name.
Both are incorrect. The real reason is the Delaware Court of Chancery, which hears all corporate litigation cases for companies incorporated in the state.
The Court of Chancery possesses, and relies on, many years of judicial precedents; it is these judicial precedents that the founders and CEO’s of some of the world’s biggest and most successful companies are seeking when they incorporate in Delaware.
The Delaware Court of Chancery was borne from the English common law system, which is law that is developed by judges, courts and tribunals which not only decide individual cases but also create law precedents (as opposed to statutes, which are created via legislation).
In the English common law system, separate courts heard law and equity matters. England’s highest court of equity was called the High Court of Chancery.
In 1792, the state of Delaware revised its Constitution and added a special provision for a court of equity, i.e., the Delaware Court of Chancery. Delaware’s Constitution states it “shall have all the jurisdiction and powers vested by the laws in this state in the Court of Chancery.”
The Delaware Court of Chancery’s jurisdiction is meant to be the same as the English High Court of Chancery’s jurisdiction in 1776, and so it hears and determines all equity-related matters.
In this modern era, the Court of Chancery mostly hears corporate litigation cases as well as litigation related to trusts, estates, wills and land purchases. It also hears cases based on real estate title ownership and general contractual issues.
The most noteworthy type of case handled by the Delaware Court of Chancery is called a “Derivative Suit.” This is where the stockholders of a company are suing the Board of Directors of the company over financial matters or control issues.
The interest of the stockholder is the money the company makes. They want it to be distributed to the shareholders as dividends. The Directors, however, hold the power to dictate how the money will be spent, and they will often opt for buying out competitors, creating an expansion program or initiating huge salaries for company officers.
When the two groups clash, the case goes to the Delaware Court of Chancery where one Chancellor (not a jury or a group of judges) decides the case as a matter of fairness.
Over the 200 year history of the Court of Chancery, these cases are usually decided in favor of a Board of Directors, as long as the Directors have acted in good faith in their decision making. The proper way to say this is, “The Delaware Court of Chancery usually respects the good-faith decisions of the Board of Directors above the selfish interests of the shareholders.”
However, when the Directors shirk their duty to be loyal to the best interests of the company, or to take due care in making their decisions, or when they engage in self-dealing and fraudulent actions, the Court of Chancery has the power to punish them by levying personal fines and removing them from office.
The Court also has jurisdiction over several other matters; it has the sole power to appoint guardians of the property and person for mentally and/or physically disabled Delaware residents and can also assign guardians for minors.
The Court of Chancery has earned the respect of both the domestic and international business world, and it is the wisdom and consistency of the Chancellor and Vice Chancellors that continues to motivate new entrepreneurs to incorporate their startup companies in Delaware.
Delaware’s reign as the nation’s number one place to incorporate is no secret, but what remains a secret to so many is the reason why it is number one.
Actually, Delaware’s “corporate crown” can be credited in large part to a court system whose roots reach back to feudal England.
In its infancy the Court of Chancery was set up by the King of England to hear matters where no law was in existence to settle some disputes.
Thus the King’s Chancellor was to hear the case and consider the fairness of the matter. This type of court does not exist in other legal systems and only three U.S. States have such a court.
A court of equity differs from a court of law; matters before the Court of Chancery are heard as bench trials meaning that they are tried before a judge, alone. Without juries, judges are left to make rulings considering all issues of fact and law.
For more than 200 years, the Delaware Court of Chancery has exercised exclusive jurisdiction over all matters and causes in equity in the State of Delaware.
The Court is comprised of one chancellor and four vice chancellors, all of whom are nominated by the Governor and confirmed for 12 year terms by the Senate. The five chancellors must all be well versed in law and must be Delaware citizens. The Delaware Court of Chancery has jurisdiction over a number of matters including commercial proceedings, real property, guardianship, and civil matters.
The majority of the litigation heard in today’s Delaware Court of Chancery consists of corporate, trust and estate matters. The most notable power of the Court is its ability to issue injunctions and temporary restraining orders, and is most frequently exercised in corporate differences over mergers or acquisitions.
A typical merger dispute will see a plaintiff seek temporary relief to preserve the status quo until a trial can occur. If the need should arise, the Court of Chancery may order issues of fact to be tried by a jury in the Supreme Court of Delaware.
With more than 200 years of judicial precedent, the Delaware Court of Chancery is hailed as the nation’s leading forum for settling corporate disputes, and is one of the most important reasons why Delaware is the most favorable environment for the world’s commercial affairs.
The Delaware Court of Chancery has a long history deciding on equity and fairness between parties.
The tiny coastal state of Delaware is widely recognized as the best state in which to form a company, not only in the United States but throughout the world. One of the key reasons for this is the Delaware Court of Chancery.
More than half of the companies listed on the New York Stock Exchange and NASDAQ call Delaware home, as do 65% of the Fortune 500 companies.
The Delaware Court of Chancery is a major feature of the “Delaware Advantage,” and certainly a significant part of why so many companies choose to incorporate in Delaware. The Delaware Court of Chancery is widely recognized as the preeminent forum in which to settle disputes that involve fairness decisions involving Delaware corporations, LLCs and other business entities.
The Delaware Court of Chancery is a non-jury trial court that serves as Delaware's court of original and exclusive equity jurisdiction, and adjudicates a wide variety of cases involving trusts, real property, guardianships, civil rights and commercial litigation.
The court was first established in 1792 and is based on the English model of a Chancery Court. In old English law the King was the final maker of laws, but the Chancellor would hear and decide cases where there were no laws, or remedy at law.
A noteworthy aspect of a Court of Chancery is the equitable expertise that is implemented by judges rather than a jury. One Chancellor will hear your case and make the rulings, unlike the U.S. Supreme Court where the case is heard by all nine (currently eight) Justices and a decision is voted upon.
This is a significant aspect, because the Chancellors are skilled and experienced in corporate law; thus there is no need to educate an uninformed jury on the intricacies of Delaware corporate law, which saves time and thus legal fees.
Litigants can therefore rely on fair and unbiased decisions based on the law rather than public opinion. Chancellors rely on more than two hundred years of case law (history) in making their rulings. This tends to make the decisions of the Chancellors more predictable than decisions made by juries, and makes businesses more confident of a decision based on law and precedent rather than emotions and prejudices.
Corporations of all sizes are formed in Delaware because business owners understand that the Chancellors on the Court of Chancery are using the business judgement rule.
The Delaware Business judgment rule directs the Court to respect the good-faith decisions of the company’s Directors, even when the outcome of their decision may not have been the best in hindsight. Directors are charged with making informed, independent decisions with care and loyalty and the absence of self-dealing.
Sometimes those decisions are questioned by shareholders. When shareholders sue the Board of Directors the case is called a “derivative suit” which makes up the majority of the high-profile cases brought to the Court of Chancery.
The Delaware Court of Chancery consists of five justices; the head of the Court of Chancery is known as the Chancellor while the other four are called Vice Chancellors. The Chancellors must be extremely learned in the law, although there is no requirement to have practiced as a lawyer. They must be residents of the state of Delaware.
All Chancellors are nominated by the Governor of Delaware and confirmed by the Delaware Senate. They serve 12-year terms. In addition to the Chancellors, there are two Masters in Chancery that are chosen by the Chancellor. All Chancellors and Masters must be members of the Delaware Bar Association in good standing.
The current Delaware Court of Chancery is comprised of:
As business entity formation experts, we are often asked to explain the advantages of incorporating a start-up in Delaware.
Our answer typically entails the fact that Delaware's corporate law structure and legal environment are advantageous to corporations and LLCs.
In fact, the tiny state of Delaware is famous as the home of more than 65 percent of Fortune 500 companies.
A significant reason for this fact is the phenomenon known as the corporate veil.
The corporate veil is not unique to Delaware. The corporate veil is a legal concept “that separates the personality of a corporation from the personalities of its shareholders, and protects them from being held personally liable for the company's debts and other obligations.”
The corporate veil is essentially the concept that maintains corporate law throughout the world. Without the ability to act as its own entity, how else could companies transact business? The idea of a corporation or LLC acting as a separate entity and limiting the liability of the shareholders is what allows the business world to function.
The importance of the corporate veil in Delaware cannot be understated. Delaware possesses stacks of legal doctrine stipulating the separation of a corporation from its shareholders. This distance between investors and the corporations in which they have invested is what permits investors—aka shareholders—to feel comfortable in investing.
Delaware courts have been very reluctant to allow the piercing of the corporate veil. If a corporation is sued, its shareholders typically will not be held liable.
Piercing the corporate veil is defined as a situation in which a court decision puts aside limited liability and hold a corporation's shareholders or Board of Directors personally liable for the corporation's actions or debts.
Any Delaware corporation that is qualified to do business in another jurisdiction (through Foreign Qualification) can fall back on Delaware law structure; that is, a Delaware company can rely on the world-famous case law of the Delaware Court of Chancery in the case of any litigation.
Foreign qualification can play an important role in piercing the corporate veil, as a court in a state with less stringent corporate case law may rule differently when it comes to piercing the corporate veil.
In 2014, Cornell Glasgow, LLC vs Nichols demonstrated the Delaware Court of Chancery’s position where the Court recognized that closely held entities, such as the defendant's Delaware LLC, are under the complete control of their owners, and emphasized "that's why people form closely held entities, to cabin their exposure under contracts."
If contracting parties do not avail themselves of the frequently-used contractual protections — personal guarantees, security agreements and the escrowing of assets — then they cannot expect the Court of Chancery to hold owners personally liable by seeking to pierce the corporate veil.
The concept of the corporate veil is quite significant in any jurisdiction, but since Delaware remains the destination for start-up corporations and LLCs in the United States due to the Court of Chancery’s extensive case law on the subject.