The Corporate Advantages

Although Delaware is the United States' second smallest state, over 220,000 U.S. and international businesses, including more than half of the Fortune 500, are incorporated in Delaware.  Delaware began the establishment of its reputation for progressive incorporation laws in the late 1890's.  By continuing to respond to changing business conditions, Delaware offers the most attractive state for corporations in the United States.

The Delaware General Corporation Law (the "DGCL") provides the statutory background for the formation of Delaware corporations, the internal governance structure of Delaware corporations and the central relationship between Delaware corporations and their shareholders.  Delaware corporations may be formed to pursue any lawful activity, except banking or insurance.  Entities wishing to engage in banking and insurance matters require chartering under independent banking and insurance statutes.  Similarly, Delaware corporations wishing to engage in educational activities, specifically those desiring to confer academic degrees, must receive authorization from the Department of Public Instruction of the State of Delaware.

Ease of Formation:  All that is necessary to form a Delaware corporation is to file with the Secretary of State a Certificate of Incorporation.  The Certificate of Incorporation is the basic governing document of the corporation.  It must contain certain terms and is permitted to include others.  The appointment of an initial board of directors and officers, the adoption of corporate by-laws and the issuance of stock complete the incorporation process.  If necessary, the process can be completed within one hour.

Necessary Elements:

• Name of corporation
• Name and address of corporation's registered agent in Delaware
• Purpose of the corporation
• The number, par value (if any) and terms of authorized stock
• The name and address of the incorporator

Permissible Elements:

• Authorization or denial of power for board to amend by-laws
• Preemptive rights for some classes of stock over others
• Limitation on the otherwise perpetual existence of Delaware corporations
• Limitations or elimination of directors' liability for negligent acts

Shareholder Liability:  Unless otherwise provided in the Certificate of Incorporation, shareholders of a Delaware corporation are not personally liable for the corporation's debts.  It is possible to "pierce" this corporate protection, but to do so a litigant must generally show that the corporation did not maintain the "corporate formalities" or the corporation was the "alter ego" of its shareholders.

Stock:  There are no minimum requirements on the capital structure of Delaware corporations.  Delaware corporations may have a single class of stock or multiple classes of stock—whichever the Certificate of Incorporation states.  Furthermore, stock may be voting or non-voting, common or preferred.  Common stock generally is the last to be paid off in the event of liquidation, whereas preferred is generally entitled to some type of dividend and/or liquidation preference.  The preferences of preferred stock must be stated in the Certificate of Incorporation or a Certificate of Designation, which has the effect of amending the Certificate of Incorporation.  Stock may be convertible and the DGCL even permits the creation of voting debt, i.e., debt that includes a power to vote on certain matters with the shareholders.

Board of Directors:  The board of directors of a Delaware corporation is responsible for its management.  In Delaware there is no minimum number of directors, and, therefore, it is not uncommon to have single-director corporations.  Directors are fiduciaries that owe duties both to the corporation and to the shareholders.  Even where the directors and the shareholders are the same individuals, the directors owe duties as directors to themselves as shareholders.

In order to take valid board action, a meeting must consist of a "quorum," which, if not otherwise provided for by the by-laws of the corporation, is a majority of the entire board of directors.  Assuming a majority is present, a resolution before the board will be effective only if it receives the affirmative vote of a majority of the directors present.  Directors may also act by written consent, which means that a formal meeting does not take place.  When acting by written consent, a given resolution must receive the affirmative vote of all of the directors in order to be effective.

Directors are elected on an annual basis by the shareholders of a Delaware corporation.  The Certificate of Incorporation can provide for a "staggered" board, which means that directors serve staggered terms of up to 3 years.  Without the approval of the shareholders, the board of directors generally may not amend the Certificate of Incorporation, merge with another business entity or sell all or substantially all of the corporation's assets.

Officers:  The officers of a Delaware corporation are chosen by the corporation's board of directors.  The term of offices and the duties of the respective posts are generally set forth in the by-laws of the corporation.  There is no prohibition against one individual simultaneously serving as all of the officers of a Delaware corporation (i.e., as president, vice-president, secretary and treasurer), even if such individual is also the sole director of the corporation.  Similarly, there are not specific officers that every Delaware corporation must have.  This is a matter that is afforded a great degree of flexibility.

Taxation:  One of Delaware's primary advantages is its favorable tax treatment for corporations.  The extent to which a Delaware corporation is subject to Delaware income taxes will depend upon the nature and the activities of the corporation that are conducted within Delaware and whether the corporation qualifies for certain exemptions from Delaware's corporate income tax.

For example, a corporation that is simply incorporated in Delaware but does no business in Delaware and only has a statutory registered agent, will not be subject to Delaware corporate income taxes.  Similarly, corporations whose only activities within the State of Delaware are the maintenance and management of intangible assets, so-called Delaware investment holding companies, do not pay Delaware income taxes.  (Click here to read article about Delaware Investment Holding Companies).  On the other hand, if a corporation is actively engaged in a trade or business in Delaware, its income will likely be subject to Delaware's corporate income tax.  For corporations whose activities are part within Delaware and part without Delaware, a special apportionment provision subjects only the Delaware-derived income to Delaware's corporate income tax.

Separate and apart from corporate income taxes are franchise taxes.  Delaware boasts one of the lowest franchise tax schedules in the United States.  The minimum franchise tax, which is based either on authorized shares of capital stock or assets of the corporation, is $30.  For this annual $30 payment, a Delaware corporation can have as much as 3,000 shares of common stock, which is adequate for even large businesses.