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School of Law Navarra University

Setting up a business
in Delaware

Julia Polvorosa Cceres

Setting up a business in Delaware

Julia Polvorosa Cceres

1. INTRODUCTION
The US is known for being the first contemporary constitution in the world which still
remains those days. One of the most important bases is the different powers between the
Federal Government and the States1 that makes the Corporate Law an issue that only the
States can legislate.
Delaware is well known all over the world for hosting a huge amount of business. A lot
of American companies are based there even though its activity takes place in other
state, such as Facebook, General Motors or LinkedIn.
In this paper I will try to explain why Delaware has more business entities than
population and why shareholders want to place their corporations in the first state of the
United States.

2. SOURCES OF DELAWARE CORPORATE LAW


Delaware, as a legitimate State has the power to design its own constitution. In 1897 the
Delaware Constitution2 was approved and subsequently it was amended.
The article IX of the Delaware Constitution contains the basis issues about Corporate
Law. One of the most relevant is mentioned in section 1, due to the recognition of the
right of corporations to work under general law, banning special acts and as a
consequence, the arbitrarily that it involves.
The general law referred to is the Delaware Code3 , which in its title 8 chapter 1 we can
find the General Corporation Law. It counts with eighteen subchapters that regularize
the process when creating a corporation and the main problems during the life of it.
The General Corporation Law does not work on its own. In Delaware the Case Law is
an important source of law, like in the states with common law legal system. The Case
Law is a principle established in a previous case enunciated by the court that will be
applicable in future case due to the similarity of the issue showed. The Case Law is not
1

The Federal Government has power to legislate the issues recognized in Section 8 Article I of the US
Constitution. The rest of issues have to be legislated by the states.
2
Delaware Constitution available online at http://www.delcode.delaware.gov/constitution. Accessed
07/01/2015, 6.41 p.m.
3
Delaware Code available online at http://www.delcode.delaware.gov. Accessed 07/01/2015, 7.00 p.m.

Setting up a business in Delaware

Julia Polvorosa Cceres

codified, so it has to be taken form the sentences of the cases. In Delaware Corporate
law, the Case Law is given by the Court of Chancery4 because of its specialization. It is
important to emphasize that the Court of Chancery is one of the three constitutional
courts.

3. FORMATION
Any person, or group of persons, physical or legal, can incorporate a corporation by
filing with the Division of Corporations in the Department of State a certificate of
incorporation. The corporation will be used to promote lawful business under this law
or any other law provided by the Constitution or any other law of Delaware.
Nevertheless, the corporations that will operate public utilities within Delaware will
have to be regulated under special legislation. 5
It is important to point that the legislative power does not restrict the access to create a
corporation for foreign people, or even for companies with its future economic activity
will not take place in Delaware.

This item makes that many companies decide to be

present legally in Delaware.

4. POWERS
Every corporation possesses and may exercise all the powers and privileges granted by
the law6 . The powers, enumerated in article 122 of the General Corporation Law,
provide the corporation a range of freedom to manage the legal person if the physical
person has the capacity to do it7 . It includes powers referred to shares, contracts or
securities.

5. DIRECTORS AND OFFICERS

Article
Article
6
Article
7
Article
5

IV 10 Delaware Constitution
101 General Corporation Law (GCL).
121 GCL
124 GCL

Setting up a business in Delaware

Julia Polvorosa Cceres

The corporation shall be managed by the director or directors. The provisions of the
duties and powers of the board of directors are made in the certificate of incorporation,
and the performance should be according to the powers given8 .
Every corporation shall have officers provided by duties and powers. One of the officers
will have the duty to record proceedings of the meetings of the stockholders and
directors in a book to be kept9 .
The main difference between directors and officers is that the officers can legally blind
the corporation and they are not liable for their acts if these are taken on behalf of the
corporation10 .
Officers, directors and stockholders can be the same physical person. This is very
common in corporations of little measurements, while the big corporations usually have
different people because of the amount of job. It is important to say that there are many
legal problems between directors or officers and stockholders because each group has
different views of the corporation and their acts are aimed to a different future of it.

5. STOCK AND DIVIDENDS


Every corporation may issue stock. It can be one or more stock or with different
characteristics: voting powers, designations, etc. The stock must be stated and expressed
in the certificate of incorporation or in any amendment thereto or in any resolution
adopted11 .
The holders of preferred stock shall be entitled to receive dividends in the percentage of
their shares upon the dissolution12 .

6. STOCK TRANSFERS

Article 141 GCL


Article 142 GCL
10
The Role of Directors and Officers in a Corporation. Available online at http:// http://businesslaw.freeadvice.com/business -law/corporations/directors_officers.htm Accessed 07/01/2015, 6.30 p.m.
11
Article 151 GCL
12
Article 151 GCL
9

Setting up a business in Delaware

Julia Polvorosa Cceres

The transfer of stock and the certificates which represents it shall be governed by
Article 8 of Subtitle I of Title 613 .
The certification of incorporation has to include the way to transfer the stock and the
possible incompatibilities with certain prospective buyers or any other restrictions14 .

7. MEETINGS, ELECTIONS, VOTING AND NOTICE


Meetings of stockholders may be held either within or without Delaware (provided in
the certificate of incorporation or designated by the board of directors and posteriorly
noticed to the stockholders). In case that a stockholder was not physically present at a
meeting, it will be possible to participate in the meeting by means of remote control if
the corporation has included measures to verify the identity of the stockholder 15 .
Each stockholder has the right to have one vote for each share of capital stock in his or
her property. It is possible to authorize another person or persons to vote in his or her
name by a document transferring the power to his or her representative 16 .
The certificate of incorporation may provide that each stockholder shall be entitled to
vote in the same proportion as the shares of capital that he or she owns 17 .
The voting rights are specified in the certificate of incorporation, including the exact
number of stockholders or their representatives at any meeting in order to constitute a
quorum for, and the votes that shall be necessary for, the transaction of any business 18 .
There is a residual disposition19 in case the voting rights and the necessary quorum had
not been included in the certificate of incorporation.
Whenever stockholders are required or permitted to take any action a written notice
shall be given with the place and date of the meeting, the means of remote
communications and the purpose of the meeting in case of a special one.

13

Article
Article
15
Article
16
Article
17
Artivle
18
Article
19
Article
14

201
202
211
212
214
215
215

GCL
GCL
GCL
GCL
GCL
GCL
(c) GCL

The

Setting up a business in Delaware

Julia Polvorosa Cceres

notification shall be not less than 10 days nor more than 60 days before the day of the
meeting to each stockholder entitled to vote20 .

8. AMENDMENT OF CERTIFICATE OF INCORPORATION; CHANGES IN


CAPITAL AND CAPITAL STOCK
Before a corporation has received any payment for any of its stock, it may amend its
certificate of incorporation at any time to be lawful to the reality. The amendment shall
be adopted by a majority of incorporators of directors in case they have been already
named21 .
The amendment of the certificate of incorporation after the payment of the stock is
possible if it is authorized by the board of directors22 .

9. MERGER, CONSOLIDATION OR CONVERSION


Any two or more corporations existing under the laws of this State may merge or may
consolidate into a corporation. The board of directors shall adopt a resolution approving
an agreement. The agreement shall state the terms and conditions, the mode of carrying
the same into effect, the amendments or changes in the certificate of incorporation in
case of merger, that the certificate of incorporation of the resulting corporation shall be
in case of a consolidation, the manner of converting the shares and such other details or
provisions. The agreement shall be executed and acknowledged and voted by the
stockholders. The new certificate of incorporation must have the same information than
any other one23 .

10. DISSOLUTION
If the board of directors decides to dissolve the corporation, after the adoption of a
resolution by the majority of the whole board at any meeting for that purpose, shall
20

Article
Article
22
Article
23
Article
21

223
241
242
251

GCL
GCL
GCL
GCL

Setting up a business in Delaware

Julia Polvorosa Cceres

cause notice to the stockholders. In the stockholders meeting a vote shall be taken upon
the proposed dissolution; if the majority approves it, a certificate of dissolution shall be
filled with the Secretary of State24 .

11. TYPES OF CORPORATE ENTITITES


1. Sole Proprietorship
A sole proprietorship is a corporate owned by a physical person who control it and it is
personally liable for all the business debts. All business income is considered personal
income to the owner and is taxed at personal income tax rates. There is not annual
franchise tax.
2. General Partnership25
In a general partnership two or more individuals or entities own and control the
corporation according to the partnership agreement. All the partners are jointly and
severally liable for all the partnership debts in the proportion of their shares. In taxation,
the individual partners prorated share of partnership income of loss is included on the
respective income tax return of the partner and taxed at personal or corporate rates. The
annual franchise tax is $300 payable to Secretary of State. This business Structure is
regulated in Title 6 of the Delaware Code, from article 15 to 101.
3. Limited Partnership26
In a limited partnership there are two or more owners distinguished in two kinds:

General Partners: They may dissolve the corporation at their discretion and
usually run business (as specified in partnership agreement). They are liable for
all business debts.

Limited Partners: They cannot dissolve the corporation at their discretion. They
are liable to the amount of capital invested.

In taxation, the individual partners prorated share of partnership income of loss is


included on the respective income tax return of the partner and taxed at personal or

24

Article 275 GCL


Title 6 Delaware Code, Articles from 15 to 101
26
Title 6 Delaware Code, Articles from 17 to 101
25

Setting up a business in Delaware

Julia Polvorosa Cceres

corporate rates. The annual franchise tax is $300 payable to Secretary of State. This
business structure is regulated in Title 6 of the Delaware Code, from article 17 to 101.
4. C Corporation
In a C corporation an unlimited number of shareholders owns the company through
stock, while business is managed through the Board of Directors. The liability is limited
to the amount of capital contributed unless acting as a guarantor of the corporate debt.
In taxation, the corporation pays taxes on business income ant the corporate tax rate and
the profits distributed to shareholders are taxed at personal income tax rate. The annual
franchise tax is based on the number of authorized shares or assumed no-par capital
payable to Secretary of State.
5. Public Benefit Corporation
A Public Benefit Corporation, as known as B Corp, has the same characteristics than
a C Corp, but exists for the public benefit or common good, but can still earn a profit.
In Delaware, a B Corp does not have any advantages when paying taxes.
6. Subchapter S Corporation
An S Corporation is owned by the shareholders through stock and business is
managed through the Board of Directors. The owners liability is limited to the amount
of capital contributed (unless the stockholder acts as a guarantor of the corporate debt).
In taxation, the corporation pays taxes on business income ant the corporate tax rate and
the profits distributed to shareholders are taxed at personal income tax rate. The annual
franchise tax is based on the number of authorized shares or assumed no-par capital
payable to Secretary of State.
7. Limited Liability Company27
A LLC is owned by one or more members and it can be controlled by them or by
managers, as set in the operating agreement. The owners liability is limited to the
amount of capital contributed unless the member acts as a guarantor of the corporate
debt. It is taxied as a partnership, corporation, or it may disregard depending on the
election made. The annual franchise tax is $300 payable to Secretary of State.

27

Title 6 Delaware Code, Articles 18 to 101

Setting up a business in Delaware

Julia Polvorosa Cceres

8. Limited Liability Partnership28


A LLP is owned by limited partners who control the corporation in accordance with the
partnership agreement. The general partners are only liable to extend of capital invested.
In taxation, the individual partners prorated share of partnership income of loss is
included on the respective income tax return of the partner and taxed at personal or
corporate rates. The annual franchise tax cannot exceed $120,000 payable to Secretary
of State.

12. CONCLUSION
Delaware is one of the most attractive states to place a business. This consequence is
not because of the innovative law, the respected courts or the amount of case law; the
law has been copied in other states, there are more respected courts all over the world
and from a European view, the English case law is older and bigger compared to a state
that is nearly 230 years old. Delaware is such a unique place for business because the
public policy has invested in the corporations. All the powers of the state work hard
every day to make simpler the life of these legal persons.

28

Title 6 Delaware Code, Articles 17 to 214

Setting up a business in Delaware

Julia Polvorosa Cceres

BIBLIOGRAPHY

Delaware Constitution

Delaware Code
o Title 6 Commerce and trade
o Title 8 Corporations

To B or not to B Corp. Interview to Deborah Sweeney, CEO of


mycorporation.com.

Available online at http://readwrite.com/2012/06/08/to-b-

or-not-to-b-corp

How

to

Form

New

Business

Entity.

Available

online

http://corp.delaware.gov/howtoform.shtml

The Readable Delaware General Corporation Law, Lynn LoPucky, 2013

Why Corporations Choose Delaware, Lewis S. Black Jr., 2007

at