setting up a business in delaware

School of Law Navarra University

Setting up a business

in Delaware

Julia Polvorosa Cceres

Setting up a business in Delaware Julia Polvorosa Cceres

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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.


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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

4 Article IV 10 Delaware Constitution

5 Article 101 General Corporation Law (GCL).

6 Article 121 GCL

7 Article 124 GCL


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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

8 Article 141 GCL

9 Article 142 GCL

10 The Role of Directors and Officers in a Corporation. Available online at http:// http://business-

law.freeadvice.com/business-law/corporations/directors_officers.htm Accessed 07/01/2015, 6.30 p.m. 11

Article 151 GCL 12

Article 151 GCL


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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 stockholder15.

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 representative16.

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 owns17.

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 business18.

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. The

13

Article 201 GCL 14

Article 202 GCL 15

Article 211 GCL 16

Article 212 GCL 17

Artivle 214 GCL 18

Article 215 GCL 19

Article 215 (c) GCL


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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 223 GCL 21

Article 241 GCL 22

Article 242 GCL 23

Article 251 GCL


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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 25

Title 6 Delaware Code, Articles from 15 to 101 26

Title 6 Delaware Code, Articles from 17 to 101


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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


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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


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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 a New Business Entity. Available online at

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

The Readable Delaware General Corporation Law, Lynn LoPucky, 2013

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

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