⛳ On this day in 1929, the iconic golfer Arnold Palmer was born.

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Today, we'll discuss why businesses of all sizes flock to the small but mighty state of Delaware, and more, in just 4 minutes to read.

— Matthew

QUOTE OF THE DAY

"A happy life consists in tranquility of mind.

Gratitude is not only the greatest of virtues, but the parent of all others."

— Cicero

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WHY BUSINESSES LOVES DELAWARE

The corporate registrar

No matter where you live, you probably interact with Delaware companies daily. Possibly, every hour.

Delaware is a corporate paradise, with more registered businesses than residents. The state is “home” to Amazon, CVS Health, Google, Facebook (Meta), Visa, Verizon, AT&T, Walgreens, Tesla, Walmart, American Express, Disney, and many others. For example, Apple’s operational headquarters are in Cupertino, California, but it’s legally incorporated in Delaware.

Companies incorporate — making themselves a legal company — in Delaware, mostly because they don’t have to pay much in corporate income tax.

The numbers are profound. Delaware is the second-smallest state in the U.S., yet it has about two-thirds of Fortune 500 companies. Over 1.6 million companies are incorporated there, even though many don’t have a physical presence there besides a post office box.

And more than 90% of the U.S.-based companies that went public in 2021 were registered in Delaware, a state that has come to embrace capitalism for its financial livelihood. The state’s business-friendly environment makes it a hot spot for companies of all sizes. Nationally, many Americans associate the state with beaches, farms, and tax-friendly laws.

Author Hal Weitzman’s 2022 book, “What’s the Matter with Delaware?” explores how the state became business-friendly. Many companies that officially register in Delaware do no real business there, and the state essentially has a monopoly on out-of-state incorporations.

“Delaware is the closest thing America has to a registrar of corporate births, marriages, and deaths—companies are formed there, they go there to seek legal approval for mergers, or to have legal disputes with each other, and they go to file for bankruptcy. Delaware is for corporate life events,” Weitzman said last year.

Pro-business

Delaware’s rise as a pro-business power traces back to 1899 when the state adopted a general incorporation act to attract more businesses. One of the central elements was that Delaware undercut other states on the fees it charged for corporate formations. One report noted that Pennsylvania charged about $3,000 for new entities, more than $70,000 today, while Delaware charged only $150.

Today, the one-time filing fee is only $90, regardless of company size, and minimal ongoing fees exist. The most noteworthy is a $300 annual franchise tax fee, whether you’re as big as Amazon and Meta earning billions in revenue, or a five-person computer company doing less than $1 million in sales out of a garage.

Most companies legally based in Delaware have all of their operational presence elsewhere. But they also like that Delaware has a unique court system for corporate legal cases.

Reason after reason

The primary reasons for business in Delaware:

• Court of Chancery: Delaware has a separate court system for corporate cases. It focuses on business disputes and has a reputation for corporate law expertise. Its judgments are generally more predictable than those of other states.
  

• Flexible corporate laws: Delaware allows firms to customize their governance structures. For example, when Google restructured and transformed into Alphabet in 2015, Delaware’s corporate governance flexibility allowed for a smooth transition.
  

• Easy-breezy: You can set up a company in Delaware in under half an hour with minimal effort or documentation on the internet from anywhere, a shorter process than acquiring a library card.
  

• Tax benefits: There’s no sales tax in Delaware, and its corporate income tax is relatively low compared to other states. (Delaware is one of only five U.S. states without sales tax: Alaska, Montana, New Hampshire, and Oregon are the others.)
  

• Privacy: Delaware doesn’t require businesses to disclose the names of shareholders or directors in public filings, a sense of privacy and anonymity that businesses find attractive.
  

• Access to capital: A concentration of companies has sometimes made financing easier via major financial institutions, VC funding, or private equity.
  

• Global recognition: Delaware businesses are recognized and accepted worldwide, enabling easier global business transactions.
  

• Follow the crowd: Across markets, sometimes people do something simply because others do it. Authors have argued that many companies incorporate in Delaware because they know many other people who have.

The catch

Still, all of this begs the question: What’s the catch? And why don’t other states emulate Delaware? Many states have tried implementing elements of Delaware’s pro-business laws. But political hurdles stand in the way, and many politicians, lawmakers, and lobbyists in other states haven’t agreed on mimicking every aspect of Delaware’s structure.

Not to mention, a trend is a trend. With many businesses already incorporated and comfortable in Delaware, they probably won’t bother changing anything without a good financial or legal reason.

As for the catch? Everything in markets has a cost, whether hidden or in plain sight. Weitzman, the author, points out that with Delaware’s efficiency comes a “chronic lack of transparency and oversight.”

“Identities are not verified,” he said. “Legislation is not scrutinized. State governments are starved of tax revenue. And all this has enabled and abetted tax-dodging, money laundering, the flow of dark money into our political system, and the trafficking of people, drugs, and arms.”

Weitzman also writes in the book that Delaware companies have been connected to corruption, plus legal but ethically questionable behavior such as tax-dodging and hiding financial assets. Delaware has said the corporate abuse is essentially a few bad apples, which might be true. Weitzman is more skeptical, though: “Delaware has enabled and defended corporate anonymity and has allowed bad actors to use the system unhampered.”

His top solution is simple and still makes Delaware attractive to most businesses: Force companies to disclose who their owners are and verify the information, just as we do for people who want a library card. While Weitzman believes many companies registered in the state probably act ethically, we don’t know the true extent of the problem.

“It’s a mystery as to whether the cases that have come to light are the tip of the iceberg or a rogue element,” he said.

For now, companies will continue to flock to Delaware with no end in sight. Incentives drive human — and corporate — behavior.

Dive deeper

For more, check out Weitzman’s book, “What’s the Matter with Delaware?”

See you next time!

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