Over a million businesses—more than 50 percent of publicly traded companies in the U.S. and more than 60 percent of Fortune 500 companies—are incorporated in Delaware. But with a population of only 941,600 (as of October 2015), why do so many big companies, from Bank of America to Google to Coca-Cola, incorporate in Delaware?
Delaware’s courts, tax system, laws, and policies have made it an attractive state for businesses to incorporate in since at least the early 1900s [PDF]. Speaking to The New York Times, David Brunori, a George Washington University Law School professor and tax expert, explained that “Delaware is an outlier in the way it does business … what it offers is an opportunity to game the system and do it legally.”
First, the Delaware Court of Chancery (established in 1792) allows companies to resolve disputes quickly with a judge rather than a jury. Judges for the Court of Chancery specialize in corporate law, draw on hundreds of years of legal precedent, and hear only business-related cases.
Second, Delaware’s tax system gives businesses several ways to legally minimize their tax bills. Companies that are incorporated in Delaware but do business in other states don’t have to pay state corporate income tax to Delaware. Some groups accuse Delaware of being a tax haven because the “Delaware loophole” allows companies to declare certain types of revenue in Delaware rather than in the state where the business actually occurred. Delaware also doesn’t tax profits on royalty payments, trademarks, or copyrights.
Third, Delaware’s laws and policies make it easy for businesses to incorporate, avoid liability, and retain privacy. Delaware’s Department of State makes it convenient for businesses to fill out incorporation paperwork, which can be done in under an hour. Because they don’t have to give much personal identifying information, company officers who incorporate or set up business accounts in Delaware can also maintain privacy, ensure anonymity, and avoid personal liability.
Because Delaware has had a reputation for being friendly to businesses for such a long time, it makes sense logistically for businesses to incorporate in the state. Most corporate attorneys know Delaware’s business laws, and many IPO-minded investment banks prefer to work with companies that are incorporated in Delaware.
Not everyone loves Delaware’s stance on business, though. Because of its relatively lax regulations, the state attracts illegal businesses that can easily establish shell companies and launder money. Delaware requires very little documentation and identification information to set up a shell company, so it can be even easier to set up a business there than in an international tax haven like the Cayman Islands. Additionally, other states collect less tax revenue because so many businesses choose to incorporate in Delaware rather than nearby states such as Pennsylvania and New York.