Delaware is Right, Unless It’s Not

In the context of forming a U.S. affiliate, I’m often asked by non-U.S. companies whether Delaware is the always the best jurisdiction to form an entity. My answer: not always.

Irish and Northern Irish businesses should realize that the formation of business entities in the U.S. is done at the state level, not the Federal level. While Delaware is an attractive jurisdiction for corporate law, it’s not a huge business center—at least not the size of New York, California, Illinois, Texas, etc. That leaves the Irish/NI parent with a choice: (i) form the legal entity in the state where it will do most of its business; (ii) form the legal entity in Delaware and register it as a ‘foreign’ corporation in the state where it will do most of its business.

The second option requires a short registration in the jurisdiction where the affiliate conducts business. Each year, under this option, the affiliate would have to file informational returns with the corporate regulator in each of Delaware and its ‘primary’ state—and pay relevant taxes (Delaware’s franchise tax, for example) and fees to each jurisdiction. Under the second option, the entity’s internal affairs would be controlled by/interpreted under Delaware law, regardless of where its ‘primary’ office is located. The first option only requires dealing with one jurisdiction’s regulators.

Delaware offers some significant advantages. Its business laws (especially its corporate code and its LLC code) are well-developed, predictable, stable, and serve as templates/examples for other states. These laws offer significant flexibility to the persons/companies drafting corporate documents—there are few mandatory items required in, for example, a limited liability company agreement under Delaware law—and many items in the statutes contain language that allows the formation documents to override, or ‘trump,’ statutory provisions. The Delaware codes generally are favorable to management/parents as well as officers and directors. In addition, the Delaware courts—specifically the Chancery Court—are excellent in deciding corporate/business/company disputes—and there are no jury trials in the Chancery Court. In some ways, the annual Delaware franchise tax could be viewed as a ‘rent’ for the privilege of using Delaware law for formation/operation of a business entity where the affiliate conducts most of its business in another state.

An Irish or Northern Irish parent wouldn’t be wrong to form an entity under the laws of another state. In many ways, it is most efficient for the business to form an entity in the state in which it will focus its operations—and that is often the choice made by foreign companies operating in the U.S. This route would avoid the compliance burden of filing informational returns, each year, in multiple jurisdictions.

Perhaps the one jurisdiction that may be a bit of a question mark is California—as its business codes are not as favorable to management as the codes in other jurisdictions. This isn’t to suggest an Irish or Northern Irish company avoid California—it should, of course, do business there. However, in terms of initial formation, if California is to be the center of the Irish or Northern Irish company’s operations, it’s worth a discussion to see if the company is better served by forming the entity in Delaware and registering as a ‘foreign’ entity in California.