Delaware is the mecca of business in the United States. A majority of American giants like Facebook (Meta), Google, Ford, Coca-Cola, etc, all of these companies are registered in Wilmington, the largest city in the state of Delaware. In fact, Delaware has become a default option for any startup aiming big. But why so?
The simple answer is – Because there are tons of benefits for them:
- The first one is corporate secrecy. Registering a company in Delaware is very easy because LLCs and corporations incorporated in the state of Delaware do not require mentioning the list of shareholders or major investors in their annual compliance filing which gives these investors a bit of secrecy. This is a big benefit when you are establishing a business in the long term from an asset protection standpoint to a liability standpoint, it makes sense to establish an entity structure in a state that provides anonymity laws, and Delaware provides such protection.
- The second most coveted benefit will be its judicial system. A big difference between the judicial system in the state of Delaware and other states of the US is the Delaware’s Court of Chancery while in other states, there is a jury system to decide on the cases. Not only the Delaware’s state law clear in terms of corporate laws, it’s non-jury system and the corporate law skills of the judges of this court, make the state far better for swifter dispute resolution.
- Every business hates paying taxes. Delaware is famous for being a Tax haven. Now coming to how it is considered to be a tax haven. The US has two tax systems – The federal tax rate is about 21% and the Delaware state tax is about 9%. So, every company is supposed to give the federal tax and state tax that applies to them in that particular state. What happens to companies registered in Delaware? If a company is carrying out business in a state other than Delaware, it is not required to pay the state tax in Delaware. This is where the franchise tax system comes into the picture.
- The franchise tax model means companies register themselves in Delaware but set up other branch offices of those entities in other states and hence called foreign entities. Such entities need to pay a franchise annual fee to the Delaware entity for allowing it to use its brand name and business idea and that franchise fee that they pay in the other states is allowed as an expense calculated for tax purposes in the state in which such entities are operating and that franchise fee when it comes to Delaware entity is tax-free. This franchise tax system suits entities that have ambitions to be the next Facebook, Amazon, or Google.
- Another benefit of big corporations setting up in Delaware is because of the Low state incorporation fees. The state incorporation fee for Delaware is less than a hundred dollars whereas if you go to states like California, you have to pay more than a hundred dollars every year to run a business there.
- Delaware not only offers personal asset protection for members of the LLC but it prevents creditors of the owner from controlling or liquidating the assets of the LLC. States like Delaware have such COPE laws, which say that hostile creditors of a member cannot take over the ownership interest of the owner of an LLC, but can only be entitled to the profits/ financial rights until the debt is paid off. Hence, the voting rights and management still remain with the owner even if the creditor is successful in getting a “charging order” from the court. This benefit is offered irrespective of whether the LLC has one member or more than one member.
The key to setting up business in Delaware is having an ideal climate for doing business, a legal framework that offers shareholders, entrepreneurs and investors sufficient trust. It’s a land of lawyers, and business owners and everything revolves around corporate services there.
– Written by Kanika Meena.
