Why is your business formed in Delaware?
I’ve formed companies of different types in several different jurisdictions over many years. I’ve listened to a lot of entrepreneurs, people with a passing interest in “business” and taxation, lawyers and others who all have weak incomplete arguments for what Delaware is good for.
Delaware is overrated and there are cheaper, faster and better places to put your company.
All it comes down to is that most people can’t read and the people that read for them are lazy.
“But Delaware has business-friendly laws”, this implies other places do not have business-friendly laws and the only way that’s true is if legislatures in 57 states and territories all sat on their hands for 30+ years and did not compete in this field whatsoever, and that is just within the United States. So would you really know? Would that person you respect actually know? Is that book you read really up to date?
“But Delaware has the business-friendly court and case law.”, Is that really useful for you?
A) Practically all commerce is interstate commerce, so it is very easy for one party to establish jurisdiction in a Federal venue and argue in the Federal government’s regional courts completely ignoring the existence of states, or in another state where one of the parties resides or where the disagreement actually occurred.
B) Any court can lean on rulings from a Delaware court if they are unfamiliar with the nuanced topic,
C) And, you get a choice to argue for a completely opposite or different ruling in a court that isn’t more closely bound to pre-existing decision. These are luxuries.
D) You can always incorporate in Delaware later and migrate an existing business if you think you can perceive the need for certain formalities.
Even venture-backed companies lose benefits by flocking to Delaware. The state passed stricter transparency laws that allow private securities holders such as employees to demand financial information. This introduces a compliance burden far exceeding any Federal law. Employees at any startup should be aware of this perk. The irony being that many people reserve Delaware corporation for “when things get formal” with the addition of institutional investors, but startups are still often not the best entities to inherit unnecessary compliance burdens.
Businesses have to be created and they gain the benefits of personhood after being bound to an autonomous territory in the process of incorporation. Businesses do not have to “do business” and in this abstraction they can be more generally called entities, and incorporation can be more generally called entity formation.
In the United States there are 50 states, 1 district, 5 territories, and at least 1 reservation that all have their own incorporation statutes. With incorporation statutes you can form entities in all of these locations, Delaware is one. Unlike most countries, the national government does not have the ability for private persons to form companies and the US Congress has to pass a new law to create a one-off charter for any business entity it forms. In comparison, a “Panama company” is formed with the national government of Panama, not a state or provincial government like Bocos del Toros. There are no “Bocos del Toros” companies only “Panama” companies, while the opposite is true in the US as there are “Delaware” companies but not “United States” companies.
To expand the breadth of your observations, do note that there are some countries where some of their states have incorporation laws, and there are some countries where some of their states have incorporation laws and the national government also has incorporation laws. Knowledge is power. Perhaps there is a state in Panama that has incorporation laws that are completely unknown to the international community, and that are simultaneously stronger and more beneficial than other laws for forming an entity.
What is a strong incorporation law, what makes one set of laws better or worse? This is easy:
- you want nobody being able to know who owns the company, or at least the option of privacy
- you want the company to be able to own things in its name
- you want to be able to easily transfer ownership in the company
- you want nobody to be able to do anything to you if they did find out you own the company
All of these semi-autonomous administrative districts (“jurisdictions”) have a catalog of entity types that you can form that accomplish the above criteria in varying degrees. Entity types may be terms you are familiar with such as the Corporation (Inc.), the Limited Liability Company (LLC / Ltd), the Limited Partnership (LP) just to name a few, and there are terms you may be unfamiliar with such as Societe Anonime (S.A.), Segregated Portfoio Companies (SPC), Series LLCs (SLLC).
There is a wide range of competition and innovation in these entity types. In the United States alone some states offer entity types that no other state has ever heard of, that the national government has no familiarity with, that the IRS has no guidance on how to tax.
For example, by time of writing the “Series LLC” exists in only 17 states — this is one entity where multiple business lines or forms of liability can be pursued without a lawsuit and judgment being able to pull from the assets or income of unrelated business lines. Typically, if you want this separation you form another business entity. The Series LLC makes this unnecessary, in theory. The same concept exists in the British Virgin Island’s “Segregated Portfolio Company” which allows this same level of segregation.
There are many kinds of businesses that need to be formed in the physical place they do business with tangible goods, such as brick and mortar stores. This whole discussion revolves around businesses that deal with intangible goods such as consulting or software services, and holding companies that own other businesses or the title to assets and intellectual property.
Furthermore, you can mix and match companies. A holding company in a perfect jurisdiction can own the company formed where your physical operations have to be, or a group of companies that you ultimately control can follow a protocol to gain many tax and liability advantages with or without owning each other. They can be formed in several different jurisdictions, so there are infinite possibilities and a few time tested ones.
The only way to know the absolute best state for your own entity formation is to read and shop around. Lobby for different laws in a state, lobbying has competition so you need to look for when the competition might be absent. When a separatist movement has resulted in civil war and splintering into a new autonomous jurisdiction, be the first entrepreneur there to ask for the most ideal set of incorporation laws to fit your desires. The strongman/democratically elected administration wants legitimacy and a rationalization for business. Just make sure the kickback is also codified into the new law as an incorporation fee, “limited liability” means you are paying a state for protection no matter what the transaction is called and inheriting an exemption from personal liability. These barriers of entry rise and fall, so pay attention. For example, what are the incorporation laws of South Sudan? What can they be? It is beneficial that this question is not the priority of anyone else thinking about the subject of South Sudan. It could be the perfect jurisdiction for your holding company or anonymous South Sudan Private Foundation, but you have to look for yourself.
Some jurisdictions are simply better at incorporation. Although a place may have favorable laws, the executive branch can be completely inept or ill-equipped. Delaware is skilled and quick at creating LLCs and Corporations when requested within several days, but requesting a more obscure entity type might paralyze the entire administration for months. Other innovative states are often the same way: Wyoming’s Secretary of State office can create an LLC in hours, but another entity type could take much longer.
There are only a few states that are competent at any part of their incorporation statutes: Delaware is one, Wyoming is another.
Wyoming is very modern in that they also have a Court of Chancery — a court that only hears business cases, just like the one Delaware is known for. It is also cheaper and faster than Delaware to form LLCs and beats on posted fees.
Reading incorporation statutes around the world is a waste of time, and no individual lawyer or law firm is aware of everything either. So what can you do? You need resources.
Big accounting and advisory firms such as KPMG, Deloitte, Ernst & Young (EY) keep track of entity types and have catalogs to help you stay aware of entity types and possibilities compared between jurisdictions. With these comparative analyses, you can then dive deeper to see if something is right for you.
In conclusion, Delaware most likely is not relevant to your entity. It is easy to get familiar with the catalog of available entity types without reading laws around the world.