Rethinking Incorporation: Why Public Companies Are Ditching Delaware

A noticeable trend has emerged among public companies: an increasing number are leaving Delaware, historically the go-to state for incorporation, in favor of other states. Among these new destinations, Nevada stands out as a particularly attractive option. Factors such as the regulatory environment, tax benefits, and overall business climate drive the shift.

The Historical Preference for Delaware

Delaware has been the premier state for incorporation in the United States for decades. Over 60% of Fortune 500 companies are incorporated there, and over half of all publicly traded companies choose Delaware as their corporate home. This dominance can be attributed to: 

Specialized Court of Chancery

Created in 1792, the Delaware Court of Chancery focuses on corporate law and equity cases, providing a unique and sophisticated forum for resolving complex corporate disputes. Its judges, or chancellors, are appointed based on their expertise in business law, which ensures that knowledgeable and experienced legal professionals decide cases.  

Predictable Legal Framework

The Delaware General Corporation Law (DGCL) is well-established and regularly updated to address emerging issues and trends in business. It is known for its clarity, flexibility, and stability, critical factors for companies looking to minimize uncertainty and risk in their operations. Delaware’s corporate laws’ predictability also allows businesses to plan more confidently and reduces the likelihood of unexpected legal challenges.

Business-Friendly Legislation

Delaware’s legislative framework is designed to be particularly favorable to businesses, which is a key factor in its dominance as a corporate hub. The state legislature, in collaboration with the legal and business communities, regularly updates the Delaware General Corporation Law to ensure it meets corporations’ evolving needs. These updates often aim to make the law more flexible and accommodating to businesses’ interests.

An Emerging Trend

Despite Delaware’s historical advantages, several factors are contributing to the trend of companies exploring other states for incorporation:

• Rising Costs: Incorporation in Delaware is not without its financial burdens. Although graduated, the state imposes significant franchise taxes based on company size and revenue, which can become significant for large corporations.

• Increased Scrutiny and Litigation: The rise in shareholder activism and the frequency of derivative lawsuits in Delaware has led some companies to seek jurisdictions with a less litigious environment. While the Court of Chancery is efficient, the volume of cases can still pose a considerable distraction and financial drain on companies.
• Changing Regulatory Climate: Delaware has faced pressure to reform its corporate governance laws in response to national trends favoring greater transparency and accountability. These reforms aim to protect shareholders but can impose additional compliance burdens on corporations.
• Perception and Preference Shifts: As businesses evolve and new markets emerge, companies re-evaluate their incorporation choices, seeking jurisdictions that better align with their operational strategies and business goals.

Advantages of Incorporating in Nevada

• Tax Benefits: One of Nevada’s most attractive features is its favorable tax environment. Nevada does not impose corporate, franchise, or personal income tax. This can result in cost savings for businesses, especially those with substantial profits.
• Privacy Protections: Nevada offers strong privacy protections for business owners. The state does not require disclosing corporate officer or director information in public records, providing a layer of confidentiality for company executives.
• Business-Friendly Legal Framework: Nevada’s corporate laws are designed to be flexible and accommodating to management. The state can protect directors and officers through statutes that limit personal liability, reducing the risk of litigation.
• Lower Litigation Risks: Unlike Delaware, Nevada has fewer shareholder lawsuits. This is partly due to the state’s statutes, which are more favorable to directors and officers, thus discouraging frivolous litigation.
• Simplified Corporate Governance: Nevada allows more lenient rules regarding corporate governance. For instance, it permits a single individual to hold all officer positions and be the sole director, offering more corporate structuring flexibility.

Delaware vs. Nevada: Which Is Better?

Legal Environment

While Delaware’s legal environment is highly developed and predictable, it can be seen as overly complex and heavily litigated. On the other hand, Nevada offers a simpler, more management-friendly legal framework with less risk of litigation. This can particularly appeal to smaller public companies or those seeking to minimize legal distractions.

Cost of Incorporation

Delaware’s incorporation fees are relatively high, and annual franchise taxes can be substantial, especially for large companies with many shares. These costs can add up and become a considerable expense over time. Conversely, Nevada has a more cost-effective incorporation process with lower initial filing fees and no corporate income tax or franchise tax on income.

Regulatory Flexibility

The DGCL is often updated to reflect new business practices and challenges, ensuring it remains relevant and supportive of corporate innovation. In contrast, Nevada offers a more management-friendly regulatory environment with fewer requirements and less oversight. Nevada’s corporate laws are flexible and offer significant latitude for corporate decision-making. 

Shareholder Relations

Delaware’s laws are designed to balance the interests of shareholders and management, which is beneficial in many contexts but can also lead to increased scrutiny and litigation. Nevada’s statutes are more management-friendly, providing stronger protections against shareholder lawsuits and thus creating a more stable operating environment for corporate officers.

Case Studies: Companies Making the Move

Several high-profile companies, including Tesla, Inc. and Zappos, have recently decided to incorporate in Nevada, showcasing the practical benefits and success that can come from this strategic move.

Tesla, Inc.

Tesla’s decision to build its Gigafactory in Nevada brought significant attention to the state. While the company is incorporated in Delaware, locating such a major facility in Nevada underscores the state’s business-friendly environment and tax incentives.

Zappos

Headquartered in Nevada, Zappos—an online shoe and clothing retailer—benefits from the state’s favorable business climate. Zappos’ incorporation in Nevada aligns with its need for operational flexibility and a supportive regulatory environment.

Final Thoughts

As more companies recognize the advantages of incorporating in Nevada, the state is poised to continue refining its corporate laws, potentially challenging Delaware’s historical dominance. This ongoing evolution could herald an exciting shift in the corporate landscape, with Nevada emerging as a premier destination for incorporation.

At NCH, we are dedicated to supporting and guiding businesses to take advantage of Nevada’s favorable corporate environment. Our team of experts, with their in-depth knowledge and experience, will ensure your incorporation process is smooth and efficient, allowing you to focus on expanding your business with confidence.

Visit our website or call 1-800-508-1729 to schedule your complimentary consultation.