Several American companies have a business connection with the State of Delaware. What is the advantage? THANKS ! – Martin Turcotte
Our reader perhaps does not think he is saying so well. In the United States, little Delaware has 1 million residents, but 2 million businesses, according to the state government. Nearly 70% of the companies appearing in the famous Fortune 500 list of the largest American companies are registered there!
Delaware attracts both public companies like Apple and Google – and their trillions in market capitalization – and single-person limited liability companies. For what ?
“There can’t be one reason that drives all these different companies,” says Hal Weitzman, associate professor at the University of Chicago Booth School of Business, in an interview with The Press. Former journalist at Financial Timeshe signed What’s the Matter With Delaware, a book on the extraordinary power of attraction of the State over businesses and its harmful effects.
It has three fundamental attractions: particularly effective business law, advantageous taxation… and the fierce defense of anonymity.
Very well-run courses
“A lot of people go to Delaware and they don’t even know why,” quips Hal Weitzman.
When foreign companies set up shop in the United States, their investment banks often require them to register in Delaware. Their lawyers simply want the contracts and financing they sign to fall under its jurisdiction, which outrageously dominates American business law.
PHOTO PROVIDED BY THE UNIVERSITY OF CHICAGO BOOTH SCHOOL OF BUSINESS
Hal Weitzman
Delaware writes business law for the United States, and even for the entire world!
Hal Weitzman
This is because its corporate justice system is particularly effective. Unlike most other American administrations, Delaware has retained its “Court of Chancery”. Since 1792, this tribunal for settling disputes between individuals, inherited from the British, has been constantly improved.
“Commercial law is modified every six months to adapt to business people,” says Vincent Allard, a Quebec business lawyer based in Delaware.
Result: very fast procedures. “It’s very interesting for companies because they are constantly being sued, they have to resolve conflicts between shareholders, complete mergers and acquisitions…” explains Hal Weitzman
Delaware Loophole
The State also has purely fiscal advantages: it does not levy income tax on companies that do not come from its territory and has no sales tax, in particular.
Vincent Allard points out that companies must, however, pay tax in the state where they conduct their real business, as well as the much higher federal tax.
Hal Weitzman, however, has well documented what is called Delaware Loophole. This stratagem makes it possible to take advantage of the tax exemption in the State on “intangible assets”, such as trademarks, by transferring income from intellectual property there.
The professor gives the example of the Home Depot hardware store chain. In the 1990s, its subsidiaries in other states began paying billions to a Delaware shell company called Homer D Poe, allegedly to use its own brands.
Anonymity
But most Delaware businesses are far from large corporations. In fact, almost three-quarters are limited liability companies, which can be owned by just one person. They are especially attracted by the speed of the registration process and the great discretion that the State offers them.
“You and I can start a business in half an hour,” says Hal Weitzman. We wouldn’t need to go to Delaware, we wouldn’t need to show any identification, or even put our names on the documents. »
This is why the state has been in the spotlight in numerous investigations involving illicit funds. In 2019, for example, authorities arrested Lev Parnas and Igor Fruman. Associates of Rudy Giuliani, Donald Trump’s lawyer at the time, they hid foreign political donations in anonymous Delaware shell companies.
A new federal law, the Corporate Transparency Act, must force within a few months all companies in the country to declare their true owners. However, this information will not be accessible to the general public, as is the case in Quebec and the United Kingdom.
Vincent Allard points out that other American administrations are no more transparent than Delaware. In Canada, most provinces, including Ontario, are not doing any better either.
Hal Weitzman agrees. But the small coastal state is something of a champion of the anonymity that Uncle Sam offers to businesses.
“Over the years they have lobbied hard to keep the rules from getting stricter, until recently. So they are not just part of the system, they shape it. »