Delaware Corporation: Definition, Role of Usury Laws and Benefits

What Is a Delaware Corporation?

A Delaware corporation is a company that is legally registered in the state of Delaware but may conduct business in any state. Delaware first began to adapt its laws in the late 19th century, making changes that would attract businesses away from other states such as New York. Over time, Delaware became a respected state in which to incorporate, even if the majority of a company's business was conducted outside the state.

Key Takeaways

  • Delaware corporations are companies that are legally registered in the state of Delaware but can conduct business anywhere.
  • Roughly half of the companies listed on the S&P 500 are incorporated in Delaware because it is perceived as being business-friendly.
  • Delaware especially appeals to financial firms due to usury laws which give banks and credit card companies the freedom to charge high-interest rates on loans.

Delaware Corporations Explained

Incorporating in Delaware has become widespread among large U.S. companies; about half of the S&P 500 members are incorporated in the state. This is especially true of the financial sector. Delaware has business-friendly usury laws, which allow banks and credit card companies to have much more freedom to charge high-interest rates on loans.

Usury laws are state-based legislation that establishes limits on the amount of interest that can be applied to loans and other forms of financing. This is a form of consumer protection that regulates how much interest businesses can charge their local customers. Delaware usury laws, by comparison, give lenders greater leeway to charge interest.

The state’s legislation also applies to operations and business conducted in other states. In other words, a company incorporated in Delaware can charge interest rates in accordance with Delaware usury law rather than local usury laws even when doing business with customers nationwide.

This particular benefit of incorporation in Delaware has prompted other states to adopt more business-friendly laws. For example, some states now allow locally incorporated businesses to charge interest rates on a par with out-of-state companies that do business within the state.

Delaware is currently the leading domicile for public companies, but this could conceivably change in the future; New Jersey was once the go-to state until modern U.S. corporation laws made it a less advantageous location.

Ways Delaware Corporations Benefit

Incorporation in Delaware affords companies numerous benefits. Businesses might not have to disclose who their officers and directors when they file documents in the state at the time of a company’s formation. Furthermore, if the business does not conduct its operations in Delaware, the state’s corporate income tax may not apply. Instead of paying that income tax, those Delaware corporations instead pay a franchise tax.

Delaware’s franchise tax is an annual flat fee for limited partnerships and limited liability companies. The franchise tax for corporations is calculated based on the type of corporation, the number of authorized shares, and other factors.

Delaware's Court of Chancery is a well-respected court of equity that resolves disputes between Delaware corporations and has an extensive set of precedents, statutes and case studies from their 200-plus years of operation. Decisions from the Court of Chancery have routinely set the benchmark for U.S. corporate law; the court's experience can be very beneficial to Delaware-incorporated companies that seek guidance on particular issues.

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