Every Fortune 500 company is a General Corporation. Most of them are Delaware General Corporations, of course, but there are no LLCs, not even one, on the Fortune 500, the New York Stock Exchange or the NASDAQ. Stock exchanges are for stock companies, and that’s why the General Corporation is often referred to as a “Stock Company.” It is created with stock that can be sold on the open market.
The General Corporation is an enlightened creation by 19th century American lawyers to allow for, and provide financing for, the growth of the era’s biggest businesses--Standard Oil, DuPont, the railroads--which were all outgrowing their family partnerships or personally-owned businesses at the time. The problem was that at that time, they had no options.
Before 1875, when Delaware passed one of the first General Corporation laws, the state legislature had to approve a bill to form a “public corporatio.n” Libraries and banks were examples of the very few corporations in existence. Until the smartest lawyers in New York and New Jersey got together and wrote a law for the state of New Jersey allowing for a corporation that could be used for business purposes. It was to be available to the public “generally,” i.e., not just to those who could get a law passed. The term “general” was to be defined as available to anyone who could follow the legal procedure the state had prescribed to form such an entity. In other words, anyone could form a General Corporation simply by making an application that contains the required information to the proper government agency and is accompanied by the correct fee for filing the document. The filing by the Secretary of State’s Office is, in a real sense, the birth of the entity.
Once the state of New Jersey enacted the first law allowing for the creation of General Corporations, all of the biggest companies in the U.S. formed a New Jersey General Corporation, including the DuPont Company, which was indigenous to Delaware, a much smaller state than New Jersey, but right next door. Delaware reacted.
Using it’s smallness as its strength, the state of Delaware went to the DuPonts in the early 1900’s and offered to work with them to make fair and favorable laws to govern corporations, if they would re-incorporate in Delaware. The deal worked. At the same time, New Jersey passed a series of laws that restricted corporations and increased their tax rates. Soon, all the big companies followed the DuPonts to Delaware and Delaware became the Corporate Capitol of the United States.
At the same time, Delaware’s Court of Chancery was rapidly becoming the premier business court in the country, with almost 100 years of case law. In the final analysis, it is the Court of Chancery that explains why 63% of the Fortune 500 are domiciled in Delaware. Although these giant companies may not have a physical presence in Delaware, they are domiciled there by virtue of their choice.
Conveniently, the General Corporation structure works just as well for small, innovative companies that need to raise money to get their enterprises up and running. If you plan to raise money by selling stock to get your company quickly off the ground, the Delaware General Corporation is the entity of choice.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.