The High-touch Legal Services® Blog…for Startups!

© 2009-2017 Dana H. Shultz, Attorney at Law

How Delaware Became the Incorporation Capital

Logo for Quora, where Dana Shultz answered a question about how Delaware became the incorporation capital of the U.S.This post explains how Delaware became the incorporation capital of the U.S. It is based on a Quora question that I answered recently. Please see How did Delaware acquire its status as a corporate haven?

There are a number of law review articles about the history of Delaware corporate law and how Delaware became the home to so many U.S. corporations.

In my opinion, one of the most informative articles is Arsht, “A History of Delaware Corporation Law”, Delaware Journal of Corporate Law (1976).

New Jersey Former Incorporation Capital

Put simply, New Jersey previously had established itself as the incorporation capital. Delaware decided to outdo New Jersey.

Quoting portions of the cited article (footnotes omitted, emphasis added):

During the interval between 1898 and 1899, a small group of individuals perceived the possibilities of large revenues if new enterprises could be induced to incorporate in Delaware. This group is generally credited with the drafting of the 1899 General Corporation Law. Their efforts were not altogether altruistic, however, since they planned to organize their own corporation, modeled upon similar ones operating in New Jersey, to engage in the business of incorporating companies under the new law and representing them in Delaware.

The new law drew heavily from New Jersey’s General Corporation Law, then the nation’s most popular. It was broadly affirmative in its statement of corporate powers, in response, no doubt, to the strict construction given corporation laws by the judiciary. The Act quickly achieved popularity based upon three principal features: a simple procedure for formation; low corporate taxes ; and a broad statement of the powers granted to the corporation by the State.

Delaware Law Designed to Attract Corporations

In summary, Delaware succeeded because individuals within the state were able to pass a law that attracted new corporations due to:

  • Simple incorporation procedures;
  • Low corporate taxes; and
  • Corporations’ broad powers.

As an alternative explanation, registered agents in Delaware like to tout the state’s well-developed corporate laws and the Court of Chancery. Those features may, indeed, be of benefit to large corporations that are subject to litigation. But those features do not explain why Delaware became such a popular state for corporate formation.

Related Post: Why are So Many Corporations Formed in Delaware?

Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Categories
Business Entities