Delaware is home to a little less than 1 million people
or 0.3% of the US population. Despite how small the state is, more than 60% of
Fortune 500 companies are incorporated In Delaware, including CNBC's parent company, Comcast. Since the beginning of the 20th century, Delaware's
role has been to Provide a corporate law that is attractive to
corporate Managers. Delaware is a very popular jurisdiction for small
businesses to Incorporate from out of state. It has a lot of appeal for basically three main
reasons: convenience, Flexibility and predictability. Delaware protects both ourselves, the entrepreneurs,
and also the Investors eventually that are going to be joining on. It's an important part of the economy in Delaware
whereby they say, we're Going to do whatever we can to help and encourage
business. But the cost may outweigh the benefits for some small
businesses. While there are a lot of advantages to incorporating in
Delaware from a pure dollars and cents Standpoint for small business owners in particular, it
may not be worthwhile. It's a misnomer that Delaware is a tax haven. Actually, Delaware is on the higher end for corporate
tax. You don't pick a Delaware entity just because of tax
reasons. When people say good for business, they don't actually
mean good for the capitalist system. They specifically mean good for boards and top
managers that would like to run Companies without interference from the rest of us. So why do big corporations love Delaware? And does it make sense for small businesses to follow
suit? More than 90% of US-based companies that IPO'd in 2021
were registered in Delaware. Investors want the companies they invest in to be
incorporated in Delaware. They understand the law there. They find it easier to think about getting into
disputes in Delaware and how Those might play out and how they can deal with other
stakeholders and with attorneys when it Comes to doing business in Delaware. Amazon was originally incorporated in Washington state
in 1994. The company reincorporated in Delaware in 1996 and
then IPO'd the next year.
Even companies that are famously associated with other
states, such as Starbucks and Seattle, Washington Call Delaware their legal home. Other major companies that are incorporated in
Delaware include CVS, Uber and Twitter. The fact that investors love Delaware is important for
small businesses as well. My name is Gloria Oppong. I'm co-founder and CEO of Cleanster.com. And Cleanster.com is a platform. We like to term ourselves we're the number one cleaning
platform for reliable, trusted And effective cleaning expertise for your property
owners and also For short-term rentals. My co-founder is actually a serial entrepreneur, so
for him it was an Easy option. But for me I just needed a little bit of education in
that. But no, it was really simple. If I'm a Canadian, right? Why would I want to go somewhere else to do this? Why can't I just do it here in Canada when you want to
go Global and you've incorporated in Canada, no one is
going to look at you at all. Delaware was really kind of the the easier choice for
both of Us. Once I understood, you know, the everything, the
complications Involved, the benefits involved, yeah, Delaware was
the choice to go. So how is this possible? Businesses can incorporate in Delaware even if they
don't conduct business in the state. You can just engage what's known as a registered agent
on your behalf. Your registered agent maintains a physical address for
you. This is typically fairly easy to do, fairly
inexpensive. The mere act of getting your entity up and running in
Delaware really just requires Filing one document. If we're talking about an LLC, it's called a
certificate of formation. It's basically your entity's charter document. And all you really need to provide on that document is
the name of the entity and The physical address of the entity's registered agent
in Delaware. This is an example of a certificate of formation or
incorporation. It's a one page document that's frequently accompanied
by a short cover letter that's then submitted to the
Delaware Division of Corporations. Delaware law also provides business owners with
flexibility in how they structure their Businesses. Delaware law is extremely permissive with respect to
the rights and Powers of management. It gives management enormous autonomy to run the
corporation in whatever way it likes Without respect for the rights of employees,
consumers, shareholders Even, or other investors. Delaware has one major advantage that no other state
can compete with, and that is it Has specialized corporate law courts. Delaware is known for its court of chancery. It is a separate court system from the superior Court
in Delaware. When there is a corporate dispute, it goes
to this separate court. And what happened is that after this court was enacted
in 1792, precedent began to develop and interesting New resolutions to legal disputes developed, which set
about Expertise in Delaware to resolve corporate disputes
that other states may Not necessarily have. You have to have the laws keep pace With what's going on in the marketplace. You need laws that are currently constantly being
updated And clarified so that parties get the guidance they
need. It's not like, you know, you're going to a jury. What could take several years to go through the legal
system in other states, Can go through pretty rapidly in Delaware and hence
expedite any type of legal Proceedings. It's widely respected as an authority on business
matters trusted By both business and legal communities. Honestly, all over the world, as a place where the
rules are well Developed. It protects both investors, it protects both
entrepreneurs and the Law for doing business there is much more favorable
right For business owners. However, there are concerns about Delaware's liability
and privacy protections being
Exploited. With respect to liability, the Delaware rule is that a
corporation Is liable for its own debts, but no corporate
participant is liable for Corporate debts. So if a corporation makes a contract,
the human beings who Profit from that contract are not liable. The human beings who make the decision to enter into
the contract are not liable. Only the corporation itself is. And if the corporation is unable to pay its
obligations, then the person on the other side of the Contract is simply out of luck. There are also some concerns about certain privacy
provisions potentially making it easier to Conceal illegal activities. Delaware does not require that you identify or disclose
names of Individuals in your incorporation documents. You have to report to the state each year the names of
your officers, the names of the directors. But you don't necessarily disclose your shareholders. When you form an alternative entity, it's usually just
identifying the management Of the entity in some cases or the registered agent in
the state. But it has raised some red flags. In 2006, the Financial Crimes Enforcement Network, a
division of the Treasury Department, drew Attention to relaxed corporate laws in Delaware as,
quote, particularly appealing for those looking To form shell companies that may be used for illegal
activities such as money laundering or Financing acts of terrorism. We do in Delaware know an individual for every entity. Delaware's small. The law firms know each other. None of us want to ever be affiliated with something
like this. We do our due diligence. The Corporate Law Counsel, which is part of the
Delaware Bar Association, submits Proposed amendments regarding the corporate code. So Delaware is consistently seeking to Ensure that members of its society and that people
internationally Are being effectively represented and heard with
respect to Issues that may develop. It's pretty clear why big businesses flock to Delaware,
but it may not be worth it for small businesses to
Incorporate there if the business owner operates in
another state. If you're incorporating in Delaware from out of state,
you may end up with sort of Administrative costs like incorporation costs, ongoing
annual Franchise fees to keep your entity in good standing,
business license fees, things of that Nature. You may end up having to pay some or all of
those types of costs in both Delaware and your home state. So especially for small business owners that are very
cost conscious, startups and the like, Depending on all the factors involved, incorporating
in Delaware may not be worthwhile since you're Sort of doubling up on some of those fees. When you have this brick and mortar thing, whether it's
a real estate or a local Business, you have employees, etcetera, and everything
is operating in that same state, that's when I Generally recommend to just open a local LLC. But when it's an LLC, that's either international or
when it's across multiple states and you have Sort of multiple factors, that's when we recommend
Delaware. While Delaware doesn't have any state income tax, there
are other taxes and fees businesses may have to Pay, such as a franchise tax. Franchise taxes generally refer to just the fees that
an entity needs To pay, generally on an annual basis to remain in good
standing. And in Delaware, it's determined in part by the size of
the corporation. So big companies pay a higher tax than small
companies. And because Delaware is a relatively attractive place
to incorporate, they can Make this tax a little bit higher than other states
would. They can't make it too high or corporations would
decide to incorporate somewhere else. But still, it can be high enough to provide a pretty
substantial revenue stream For a small state. The money wouldn't be material in California, but it
is material in Delaware, which is a pretty little State without a lot of economy and a lot of people. And so a big chunk of Delaware's state budget can come
out of this relatively small Tax. Delaware's revenue from business taxes totaled $3
billion in fiscal year 2021, making Up 27% of the state's total revenue, which was nearly
$11 billion. The franchise tax sort of changes based on the amount
of shares that you issue. And so if you issue a ton of shares, then that
franchise tax goes up and it could be upwards of Thousands of dollars. And so people might be advised
by lawyers or on their own will to issue a ton
Of shares. And then they might realize that that
actually increases their franchise tax. And they're still like a relatively small business. And so that has been a case where I've seen, quote
unquote, issuing a lot of shares in Delaware backfire on them. We're still small and we have four Investors on it. And both myself and my co-founder, we own the majority
shares. So we haven't given out as many shares yet. Franchise tax is always just a set size around, I
believe 264-300. So no, it's really kind of the same. Delaware also has a corporate income tax. For corporate tax in the United States it can range
from about 2.5% to 11.5%. And Delaware is at about 8.7% for corporate tax. New York is slightly lower at about 7.25% for
corporate tax. You know, that is something for businesses to also
take into consideration if they are Thinking about saving on their taxes, they may decide
to Incorporate in the state that they're actually doing
business in. But these costs may be worth it for some small business
owners for the peace of mind Delaware law Offers. If I'm a business, large or small, I don't want to have
to Go before a judge that doesn't have the experience to
understand what $1 Billion fund is, or for that matter, my family
business that I've put my Blood, sweat and tears into is. I want reliability. I want that consistency. Even if I have to pay a high franchise tax, I'm going
where I know I Got a lot of guidance. I feel 100% protected every single time. They're in for you. Right? They're in with you. They want to see your company grow. There's like no regret of incorporating our business
in Delaware.
Not at all.
