Why Do So Many Businesses Incorporate in Delaware?

June 4, 2015

Today I received a question from a reader: “Delaware is home to some of the biggest incorporated businesses in the US, but the Tax Foundation ranks the state 50th (worst) in the corporate tax component of your State Business Tax Climate Index. How can that be?”

This is a great question. My answer:

Delaware’s attractiveness for incorporation is driven by many things: favorable incorporation regulations, rules limiting corporate liability, and a second-to-none corporate court system (the Court of Chancery) with judges that are corporate law experts.

The state’s general corporate tax code, however, leaves a lot to be desired. The state levies a top corporate rate of 8.7 percent, and there is additionally a gross receipts tax (only five states have these) that businesses pay regardless of profitability. For many businesses though, the pros of the legal and regulatory system in Delaware outweigh the cons of the tax system. This is how Delaware has chosen to compete.

So taxes don’t matter? Not quite. If we look just a little bit further to the other two popular states for incorporation, Nevada and Wyoming, we see that they have chosen to compete on tax policy instead. Those states have no individual income tax, no corporate tax (though that is changing in Nevada this year), and low corporate filing fees. For many businesses, these tax considerations are more important.

More on Delaware.

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