Delaware Corporations: Laws And Regulations

Delaware has become the de facto corporate capital of the United States, with 66% of the Fortune 500 companies, including Amazon and Walmart, incorporated in the state. The state's business-friendly laws, flexible corporate laws, respected judiciary, and customer-oriented Division of Corporations have made it an attractive location for corporations. Delaware's corporate laws, known as the Delaware General Corporation Law (DGCL), govern the internal affairs of corporations, including the relationship between owners and managers. The DGCL provides maximum flexibility for stockholders and corporations to order their affairs, with minimal mandatory provisions. Delaware's courts, particularly the Court of Chancery, have extensive experience in corporate law, providing well-developed and predictable legal precedents. The state's tax policies, reduced restrictions, and simplified corporate laws offer significant advantages for businesses. However, there are also considerations and potential disadvantages, especially for smaller businesses, when deciding whether to incorporate in Delaware.

The Delaware General Corporation Law (DGCL)

The DGCL is a specialised contract law that governs the internal affairs of a corporation, including the relationship between owners (stockholders) and managers (directors and officers). It does not address other aspects of business law, such as competition law, labour law, or securities disclosure law. Delaware's corporate law applies to all Delaware corporations, regardless of where they are located.

The DGCL provides stockholders and corporations with maximum flexibility in ordering their affairs. It is designed to be an enabling statute that permits and facilitates company-specific procedures, with minimal mandatory provisions that address only issues of utmost importance to protecting investors, such as the right to elect directors and vote on major transactions.

Delaware's corporate-friendly laws, efficient court system, and business-friendly government have made it a popular choice for incorporation. Over 65-68% of Fortune 500 companies and more than half of all U.S. publicly traded companies are incorporated in Delaware, including well-known firms like Amazon, Google, Tesla, and Walmart.

The benefits of incorporating in Delaware include lenient tax policies, reduced restrictions, privacy, expediency, and simplified corporate laws and structure. Corporations registered in Delaware that do not conduct business in the state do not pay corporate income tax. Additionally, Delaware does not have a sales tax, investment income taxes, inheritance taxes, or personal property taxes. The state also offers same-day business filings and allows a single person to hold multiple positions in a company.

The Court of Chancery

The Delaware Court of Chancery is a court of equity in the U.S. state of Delaware. It is one of three constitutional courts in the state, alongside the Supreme Court and Superior Court. The Court of Chancery is widely recognised as the foremost forum for settling disputes involving the internal affairs of the thousands of Delaware corporations and other business entities.

The chief judge of the Court of Chancery is called the Chancellor, with the other six judges called Vice Chancellors. The Chancellor and Vice Chancellors are nominated by the governor and confirmed by the state senate for 12-year terms. The Court is subject to the "major-party" rule, which requires that the majority of the court "shall be of one major political party", and the other judges "shall be of the other major political party".

Franchise taxes

Any corporation incorporated in Delaware must file an Annual Franchise Tax Report and pay the franchise tax. This report is typically due by March 1st of each year, and failure to comply results in a penalty of $200, plus 1.5% interest per month on the unpaid tax balance. The franchise tax rates in Delaware vary depending on the method used to calculate them. The minimum tax is $175 when using the Authorized Shares Method, and $400 when using the Assumed Par Value Capital Method. The maximum tax for both methods is $200,000, unless the corporation is identified as a Large Corporate Filer, in which case the tax is $250,000.

Limited Liability Companies (LLCs), Limited Partnerships (LPs), and General Partnerships (GPs) are treated differently regarding franchise taxes. While they are not required to file Annual Franchise Tax reports, they must pay an annual tax of $300 by June 1st of each year. Failure to pay this tax on time also results in a $200 penalty, plus 1.5% interest per month on the unpaid tax balance.

Delaware's franchise tax rates are typically higher than those in other states, as most states generate revenue from corporate income taxes based on the portion of the corporation's business conducted within their borders. In contrast, Delaware's franchise taxes provide the state with about one-fifth of its total revenue. This higher tax rate has been a source of controversy, with some arguing that it facilitates tax dodging and provides a safe haven for money launderers and other criminal activities.

Usury laws

In the US, national banks can "import" the laws of the state in which their principal office is located. This has led several national banks to locate their principal offices in Delaware, taking advantage of the relaxed interest rules.

While corporations formed under Delaware law can benefit from the relaxed interest rules when conducting business in the state, they are subject to the restrictions of other states' laws if they operate elsewhere.

The definition of usury in Delaware is as follows:

> "Usury is the charge to a borrower by a lender, directly or indirectly, of a higher rate of interest than that permitted by law."

If a borrower is charged an interest rate that exceeds the lawful rate, they are not required to pay the excess over that lawful rate. They may also, at their option, retain and deduct the excess from the amount of any debt. If a borrower has paid the whole debt, including interest exceeding the lawful rate, they may recover the sum of three times the amount of interest collected in excess of the lawful rate, or $500, whichever is greater. To do so, they must bring an action against the lender within one year of making the payment.

Privacy

A Delaware LLC filed through a professional Registered Agent affords the highest level of confidentiality. When it comes to an LLC's public information, only the company name and the name and address of the Registered Agent typically appear on the Certificate of Formation, along with the date of filing and the company file number. No information about the members or managers is required to be listed on the Certificate of Formation. The Delaware Division of Corporations does not request, obtain or store any information regarding the LLC’s members and managers.

Your Delaware Registered Agent is required, however, to maintain a record of the contact person for the LLC, including the contact person's address. The contact person must be an actual person (not another company) who is at least 18 years of age. The contact person does not have to be a member or manager of the LLC and does not need to reside in the United States or be a United States citizen.

In Delaware, members and managers are not required to be named in, nor to execute, the Certificate of Formation. Preparation, execution and filing of the Certificate of Formation must be handled by an authorized person or entity. This is an individual or entity that forms an LLC on behalf of the members by filing the necessary formation documents with the Delaware Secretary of State and then providing the certified documents to the members of the LLC.

The powers of the Authorized Person are merely to execute the filing of the document with the Delaware Division of Corporations. Once the document is filed, the Authorized Person delivers the LLC to the initial member(s). The legal instrument that releases the LLC to the initial member(s) is called the Statement of the Authorized Person. This statement is prepared and signed by the Authorized person and is not provided to the state of Delaware. It is not required to be filed in Delaware public records.

Corporations can also be filed in Delaware through a Registered Agent without listing shareholders, directors or officers on the public record. However, after the initial filing, every Delaware corporation is required to file a Franchise Tax report on or before March 1 of each year and, in doing so, must list the names and addresses of the company's directors and one officer. This information is required even if your Delaware Registered Agent pays your Franchise Taxes for you. Therefore, this information will be in the Delaware public records and may be obtained by anyone requesting it from the Delaware Division of Corporations (for a $10 payment). Some states post this information on their websites, but Delaware does not.

Delaware is not a secrecy haven, any more than any other state or the United States itself. Indeed, Delaware has done more than most states to ensure proper transparency.

Frequently asked questions