By Travis Turner
Delaware has been the preeminent place for states to incorporate for more than 100 years, and is home to more than one million entities, including 63 percent of Fortune 500 companies. Last year, more than 145 thousand Delaware entities were formed, 70 percent of those Delaware LLCs.
Companies choose Delaware because the state’s legislative, judicial, and legal communities work together to craft, enforce, and interpret the state’s business entity laws to provide businesses with the stability and flexibility they need to operate successfully.
The state’s business entity statutes provide the legal framework that governs the companies’ internal affairs, while Delaware’s Court of Chancery is highly regarded for its ability to resolve sophisticated business and legal disputes equitably and efficiently. The State’s Division of Corporations has a reputation for servicing corporate clients in a timely and professional manner.
Delaware’s corporate legal system attracts formations from around the United States and the world. In order to meet the sophisticated needs of its customers, the Delaware Division of Corporations operates more like a business than a government agency. The Division was the first in the nation to go paperless, to offer expedited service options, and to offer certain online services.
The Division is open until midnight four nights a week to meet the needs of customers around the world and recently received ISO 9001 certification in recognition of its quality management system. Companies pay a variety of filing fees and an annual franchise tax to the State that is set at rates that are competitive with those of other U.S. states.
“Delaware is committed to providing corporations with a pro-business environment,” explains Rick Geisenberger, Director of the Division of Corporations for Delaware. “Business owners, officers, and directors recognize that our efforts have produced a fair, reasonable, and predictable statute, judiciary, and corporate and legal services system that they can trust now and well into the future.”
Corporate Transparency Regulations
However, incorporating in Delaware does not mean that companies can hide activities or avoid paying taxes. Like other states, Delaware imposes regulatory and tax obligations and has rigorous reporting requirements for companies incorporated in Delaware. Delaware imposes these requirements as part of its commitment to corporate transparency.
Delaware’s Division of Revenue is required to collect tax and revenue information about the owners, partners, officers, and other related persons for businesses with operations in the State.
Legal entities incorporated in Delaware are also fully subject to U.S. federal tax laws and filing requirements. Owner information is tracked by the U.S. federal government by using tax identification number applications, annual tax returns, and financial account holding reports to gather required ownership information. Beneficial ownership information in the United States is generally treated as tax information and is therefore subject to strict privacy protections—although it may be accessed by law enforcement and other officials under certain circumstances.
In Delaware, as in many other U.S. states, corporations are required to disclose the names and addresses of all directors on the corporation’s annual franchise tax report. Both the incorporation filing and the annual franchise tax report are a matter of public record.
Notably, Delaware has taken significant additional steps to ensure corporate transparency, and has emerged as a leader in the field. For example, while common law in Delaware had long barred the sale of bearer shares that provide owners with anonymity, in 2002, Delaware became the first state in the country to statutorily ban the sale of bearer shares. “Delaware acknowledged the concerns raised by regulatory agencies early on and acted quickly and proactively to include in our statutes an express ban on bearer shares as well as bearer interests in partnerships and limited liability companies,” Geisenberger explains.
Four years later, Delaware enacted America’s first commercial registered agent statute to regulate company formation agents. This new law gave the Delaware Division of Corporations and the State’s courts additional authority to stop deceptive or fraudulent practices by corporate service providers in Delaware. Additionally, the new law requires every entity formed or qualified to do business in Delaware to provide its registered agent with the name and address of a contact person associated with the business and requires registered agents to maintain that information. This ensures that regulators and law enforcement agencies always have the ability to contact someone who is accountable for an entity formed or doing business in Delaware.
As concerns escalated regarding the use of shell companies in fraudulent business-to-business schemes and as a way to shield companies from regulatory scrutiny, Delaware responded in 2012 by approving new listing standards targeting formation agents that advertise “shell and shelf companies” or promise “anonymity and secrecy.” The following year, Delaware responded to concerns regarding so-called “aged shell companies” by approving additional enforcement mechanisms to ensure that companies elect directors within their first year of operation.
All of these efforts are enhanced by the fact that both federal and Delaware law provide legal mechanisms to allow managers, investors, and law enforcement agencies to access and inspect the records of Delaware companies in order to investigate the possible misuse of entities.
Companies choose Delaware because they want their internal corporate affairs governed by Delaware’s statutes, case law, and business-savvy courts. “Delaware understands that some companies may decide to incorporate here for reasons other than corporate governance,” Geisenberger notes. “We also understand regulators’ concerns that a small subset of those companies may have fraudulent intent. This is why our executive, legislative, and judicial branches have each taken important steps toward deterring and curbing the improper use of legal entities. It is also why Delaware supports similar efforts in other states and at the federal level.”
Travis Turner is Associate General Counsel at Corporation Service Company. The views expressed in this article are solely those of the author and are not necessarily shared by Corporation Service Company.