How New Jersey Invented Delaware And Why Delaware Matters

Jeffrey Robinson ? 2020

Once upon a time, New Jersey decided it might be able to change the world and, because of that, Delaware did.

Sometime in the mid-to-late 1880s, the governor of New Jersey was seeking new ways to raise money. At that point, the State’s major source of income was property tax. Around the same time, a Manhattan based lawyer named James Brooks Dill – who happened to live in New Jersey – wrote a small pamphlet titled, “The Advantages of Business Corporations.”

The governor took Dill’s premise to heart, and realized he could create new revenue by enticing businesses across the Hudson River, in high tax New York, to move to lower-tax New Jersey. Dill helped write the 1892 General Corporation Act which, among other things, meant a company in New York could keep its offices and employees in New York, as long as it moved its stock, transfer books and shareholder meetings in New Jersey.

Within ten years, and a couple of amendments that made the act even more corporate-board friendly, the State of New Jersey was earning so much from corporate filing fees and franchise taxes it abolished property taxes.

Watching from 70 miles away, in Wilmington, Delaware, an attorney named Josiah Marvel cottoned on to the idea that if New Jersey could target New York companies, Delaware could target companies everywhere. So in 1898, with Marvel’s help, Delaware passed its own General Corporation Law. It went beyond the advantages offered in New Jersey by requiring smaller capital requirements, different classes of stock, and adding no requirement that anything be physically present in Delaware, not even shareholder meetings.

Furthermore, a Delaware certificate of incorporation could contain any provision the owners of the corporation wanted which defined, limited or regulated the company, the directors and the shareholders.

Delaware emerged the victor and in the 120 years since, the state maintains its place as American foremost “offshore” corporate marketplace.

Today, with a population of around 950,000, Delaware has more than 1.3 million corporations on its books, including 300 of the Fortune 500 companies. Many Delaware companies do disclose information about what they are, what they do, how much money they make and who’s behind them, specifically the beneficial owner(s) of the company. But the point of Delaware is, there’s no requirement to reveal anything.

Transparency is not a requisite for buying the authority of a Delaware state seal on your corporation documents. As a result, corporate franchise taxes are worth nearly $800 million a year to the state.

Understandably, Delaware is often, and openly, criticized for selling corporate shenanigans. Every time someone in Washington points to Switzerland, Luxembourg, Liechtenstein, the Caymans, St. Kitts and a whole slew of offshore havens, those haven-dwellers always point right back to Delaware.

There was even a time in the earliest days of the Financial Action Taskforce (FATF) when certain people working in the US Treasury Department suggested that Britain should be blacklisted. After all, came the argument, in the British controlled Commonwealth islands banking and corporate secrecy were the norm. In turn, the British decided America should be on the list because of Delaware. In the end, neither proposal was considered because for FATF, at least in those days, self-preservation was more important. Obviously it could survive black listing Antigua and the Caymans, but throwing slings and arrows at London and Washington was out of the question.

All these years later, Delaware is still a popular target. So, too, the cheap imitations of Nevada and Wyoming. There are plenty of critics, even in the States, of America’s onshore offshore enterprise. And some of them loudly maintain that it is easier to set up a company in Delaware than it is to get a library card there.

Being a professional skeptic, I checked. And, for the record, it isn’t.

To get a card at the Wilmington Delaware Public Library, all you need is a driver’s license... or a utility bill... which means they know your name and address and can find you if you don’t return a book.

Now, it’s true that the Delaware Secretary of State doesn’t ask as much as the local librarian. But, to buy a company in Delaware you need to hire a registered agent and that agent does ask questions. You will be required to fill out a form, which lists a principal, with a billing address, to whom tax forms will be sent, and from whom registration fees will be paid. That doesn’t necessarily mean that the principal is the owner, or an officer, or even a manager of the company. It can be your late-mother’s cousin Ralph who lives in... pick a place... Eufala, Alabama. Or, Timbuktu. Although, if you’re doing business outside of Delaware, you’ll need a “good standing certificate” from Delaware, that adds to the cost and the paperwork.

At the same time, if Cousin Ralph is a foreigner, that changes things slightly, but only with the registered agent. The agent will, in principle, require certain KYC information which includes Uncle Ralph’s passport and his utility bill.

But not his library card.

So you do need a lot more paperwork for a company than a library card. But just because the registered agent doesn’t pass your information along to the state, it still means there is a paper trail that can be followed with a proper subpoena.

What's more, because you’re paying both agent and state fees, there is also a money trail.

Yes, you can walk into the Wilmington Public Library and get a card that will give you full access and privileges in under five minutes, for free. On the other hand, if you want a Delaware corporation that quickly, there is an additional under one-hour fee of $1000.

Nevada’s company formation fees are cheaper than Delaware’s, and Wyoming’s fees are cheaper than Nevada’s. Actually, Wyoming doesn’t charge a business license or officer filing fee, instead, only asking $50 a year for maintaining the company. Both states tell you they don’t share information with the IRS, but that’s not only by design, it’s also because they don’t require enough information that there’s much to share.

Both states also fall back on the same excuse you hear in Delaware, that they’re simply doing onshore what other jurisdictions do offshore. That the income from this helps keep taxes down. That if they ceased selling corporations, nothing would change. The way they see it, the business that now comes to them would simply go someplace else and they’d lose the revenue.

The fallacy there is that the business itself is already someplace else. Those $200 shell companies don’t employ people in Nevada or Wyoming. Nor do they keep any money there. They simply use the state’s protection against revealing the beneficial owner to operate somewhere else.

While Delaware, Nevada and Wyoming may not tolerate in-state financial crime - you know, "not in my backyard" - by selling corporations off the shelf like toothpaste and protecting the beneficial owners of those shells, they do what all offshore havens do, categorically deny any responsibility for whatever purpose these companies serve in someone else's back yard.

*****

? Jeffrey Robinson 2020

If you enjoyed this, there’s plenty more where it came from. Feel free to share it with your followers. I’d be flattered if you did. At the same time, I'm always looking to connect with good people out there fighting the good fight. Please send an invite, and also follow along. I'd welcome your company. Cheers/ Jeffrey