Incorporating in Delaware: The Perks and Pitfalls - WBOC-TV 16, Delmarvas News Leader, FOX 21 -

Incorporating in Delaware: The Perks and Pitfalls

Posted: Updated:

DOVER, Del.- Delaware is one of the smallest states in the union, but its home to nearly 67 percent of Fortune 500 companies and 1.3 million business entities, about 338,000 units larger than the state's population. According to the Delaware Division of Corporations, more and more companies are incorporating in Delaware, bringing the state critical revenue. Division of Corporations Director Kristopher Knight says corporations contribute $1.25 billion to Delaware's nearly $4 billion general fund.

"Without corporations we'd have a significant gap in our budget," Knight explains. "The things we take for granted like no sales tax and low property tax would need to be reassessed to make up that difference."

Creating a Limited Liability Company

Of the nearly 200,000 business entities that formed in Delaware in 2017, roughly 72 percent were Limited Liability Companies, also called LLCs. LLCs are incredibly simple to set up: all a company needs is a certificate of formation, a $90 fee and a registered agent, a person or company authorized to conduct business in Delaware on behalf of the company.

"It's basically parties who come together to form a company and their interactions with each other are governed by that contract," explains attorney Chris Simon. "And LLCs give you the freedom to contract to the terms you want to contract to."

Criminal Enterprises Linked to Delaware

But Delaware's limited liability companies have drawn scrutiny in recent years, as some LLCs have been linked to criminal enterprises. A federal indictment found nine companies affiliated with former Trump campaign chairman Paul Manafort and Robert Gates were incorporated in Delaware. A superseding criminal information document filed by Special Counsel Robert Mueller in September, the day Manafort pled guilty, lists three of Manafort's companies as Delaware LLCs. 

Former Venezuelan Vice President Tareck El Aissami was sanctioned by the Treasury Department for drug trafficking. According to Delaware Coalition for Open Government (DelCOG) President Nick Wasileski, one of El Aissami's companies is 200G PSA Holdings, incorporated in Delaware. 

In April, a federal indictment against website Backpage.com charged Backpage's CEO and executives with various money laundering charges. The Department of Justice alleges the money laundering was in part conducted via Delaware LLCs.

The aforementioned criminal activities are just some of the examples that DelCOG President Nick Wasileski says prove Delaware's LLC program needs to change.

"If I wanted to start a business today, I would do it through a LLC," Wasileski tells WBOC. "Simple to do. Low cost. Protects your assets. I mean it's really a great bill, but the criminals have found ways to misuse it and abuse it and maybe there needs to be a review of that."

Earlier this summer, DelCOG asked Delaware's Attorney General to appoint an independent counsel to review Delaware LLCs and make recommendations to improve the Delaware Limited Liability Company Act. That request was denied, though Delaware's Deputy Attorney General forwarded DelCOG's request to the General Assembly, suggesting the legislature would be the appropriate agency to review or change Delaware code. The letter states that the Delaware Department of Justice would be happy to participate in any working group on the matter. 

"Delaware: An Onshore Tax Haven" 

Some critics of Delaware LLCs say until Delaware's corporate code is adjusted, criminal activity will continue to exist in Delaware's corporations. Matthew Gardner, a senior fellow at the Institute on Taxation and Economic Policy, authored a report entitled "Delaware: An Onshore Tax Haven."

"Delaware is one of a handful of states with little or no information about who owns them or what they do. that is one element of financial secrecy and tax haven status," he says.  "A second element of this is Delaware is one of a small number of states in which certain types of income that aren't taxed at all."

Gardner says LLCs set up to collect royalties and intangible assets don't have to pay income tax in the first state.

"While it might be viewed from Delaware as a victimless crime, shifting profits into Delaware, in fact this is a drain on the resources of every other state and of many other countries," Gardner says.

Gardner also is skeptical of LLCs' required registered agent.

"That registered agent doesn't have to be meaningfully associated with the business at all. It certainly doesn't have to be an owner and there's basically no public information associated with any of these businesses," he says. "It's so phenomenally easy to set up that it is easy to see why anyone interested in any sort of criminal enterprise would choose Delaware as the place to do it."

Business Friendly, Experienced Court

But Delaware Division of Corporations Director Kris Knight disagrees with Gardner's comments.

"I think it's important to point out to everyone that the reason that we have 67 odd percent of all Fortune 500 companies is because of our Secretary of State's office and Court of Chancery and General Corporation law," he says. "All of those reasons are not why a bad guy would come here but reasons why the good guys come here."

Delaware's Chancery Court is 225-years-old and solely focuses on business law, providing unique expertise and wisdom in corporate cases. What's more, Delaware updates its General Corporations law annually and consults the state's corporate bar to do so.

"It's a partnership. They have the legal minds and they have ability to reach out to their clients and understand what the hiccups are and the concerns and the potential impact," Knight tells WBOC. "We have the ability to understand that from our perspective; measure whether or not it's in the best interest of the public to move forward in that direction or or even reach out if necessary to the judicial branch."

Cracking Down on Bad Actors

Knight stresses that the Division of Corporations does not want "bad actors" like Backpage.com to be part of the state's corporate system. Recently passed legislation gives the state new power to crack down on criminal LLCs. Senate Bill 183 allows Delaware's Attorney General to request the Chancery Court cancel a LLC's certificate of formation for "abuse or misuse of its powers, privileges or existence." That legislation was met with praise, as before its passage, the only way the Department of State could shut down a LLC was for not paying its taxes. It's that requirement that allowed Backpage.com and its related LLCs to remain "in good legal standing" in the state for weeks after the federal indictment.

"Our secretary Jeff Bullock has said from the very beginning if he had the authority he would shut down Backpage and all the affiliated companies immediately," Knight says. "But we don't have such authority and that's why we needed to let federal law enforcement do their job."

In the Deputy Attorney General's letter to DelCOG President Nick Wasileski, the Deputy AG announced the department's plans to request Backpage's dissolution under the new legislation.

In addition to Senate Bill 183, House Bill 404 directs registered agents to scan their list of customers against the federal sanctions list and allows the Secretary of State to refuse filings from agents that don't comply.

But Gardner says the state's secrecy laws must be changed before any real change will occur.

"I think it's important to recognize that you can start a criminal enterprise anywhere, but to maintain a criminal enterprise requires that you have a strategy for funneling money illegally. Money laundering is an ongoing enterprise that requires a legal structure, Delaware provides that legal structure, so it's not at all surprising at all to see that criminal enterprises of this kind would choose Delaware as the headquarters for it," Gardner says.

Governor John Carney says new legislation and better communication between law enforcement agencies will ensure bad actors are kept out of Delaware's corporate system. 

"There are ways we can address that by having this information sharing that would occur with the IRS and with federal law enforcement agencies," he says.

LLCs in the Future 

Division of Corporations Kris Knight says LLCs must be looked at at a federal level.

"I think that the primary concern that a lot of people have are related to LLCs," he tells WBOC. "Whether you are in Delaware with that LLC or you are in some other state with that LLC, it is still a LLC. So that's why we are taking the steps that I just described and continuing to look at our franchise, our processes, other entities, federal laws and regulations to figure out ways that we can strengthen it even more."

DelCOG President Nick Wasileski will be watching to see if the General Assembly takes a deeper look at LLCs, something he admits provides many benefits to businesses and taxpayers alike. 

"Maybe their needs to be an independent investigation into why the Limited Liability Act can be used and misused," he says. "If we can find out why, maybe it can be corrected."

To read some of documents hyperlinked in this article, see the PDFs below.

 

 

 

  • Most Popular StoriesMost Popular StoriesMore>>

  • Police Looking for Driver Involved in Pedestrian Hit-And-Run Crash

    Police Looking for Driver Involved in Pedestrian Hit-And-Run Crash

    Monday, October 15 2018 8:56 PM EDT2018-10-16 00:56:06 GMT
    Monday, October 15 2018 8:56 PM EDT2018-10-16 00:56:06 GMT
    The Milford Police Department is asking for the public's help in finding a driver who police say hit a pedestrian and drove off.More
    The Milford Police Department is asking for the public's help in finding a driver who police say hit a pedestrian and drove off. More
  • Man Shot in Room During Robbery at Dover Hotel

    Man Shot in Room During Robbery at Dover Hotel

    Monday, October 15 2018 9:30 AM EDT2018-10-15 13:30:29 GMT
    Monday, October 15 2018 9:50 AM EDT2018-10-15 13:50:11 GMT
    (Image: MGN)(Image: MGN)
    (Image: MGN)(Image: MGN)
    A man is in serious condition after being robbed and shot multiple times at a Dover hotel Sunday night.More
    A man is in serious condition after being robbed and shot multiple times at a Dover hotel Sunday night. More
  • Nanticoke Road Closure in Wicomico County

    Nanticoke Road Closure in Wicomico County

    Monday, October 15 2018 5:19 PM EDT2018-10-15 21:19:28 GMT
    Monday, October 15 2018 5:19 PM EDT2018-10-15 21:19:28 GMT
    Nanticoke Road (Photo WBOC)Nanticoke Road (Photo WBOC)
    Nanticoke Road (Photo WBOC)Nanticoke Road (Photo WBOC)
    A part of Nanticoke Road is closed for a significant period of time due to part of the road collapsing. The State Highway Administration is working around the clock to make the necessary repairs.More
    A part of Nanticoke Road is closed for a significant period of time due to part of the road collapsing. The State Highway Administration is working around the clock to make the necessary repairs. More
  • Most Popular VideosMost Popular VideosMore>>

  • "Hood Fight Salisbury" Cell Phone Videos

    "Hood Fight Salisbury" Cell Phone Videos

    27 cell phone videos depicting brutal streets fights among teenagers in Salisbury were posted online. Local leaders including the Mayor, State's Attorney and a Reverend react to the media.More
    27 cell phone videos depicting brutal streets fights among teenagers in Salisbury were posted online. Local leaders including the Mayor, State's Attorney and a Reverend react to the media.More
  • Nanticoke Road Closure in Wicomico County

    Nanticoke Road Closure in Wicomico County

    It wasn't more than two years ago when a part of Nanticoke road was destroyed due to a damaged drain pipe. 

    Now, it is happening again. 

    As thousands of gallons of water are being relocated from one side of the Rockawalkin Creek to the other - the road remains closed for a significant period of time. 

    More

    It wasn't more than two years ago when a part of Nanticoke road was destroyed due to a damaged drain pipe. 

    Now, it is happening again. 

    As thousands of gallons of water are being relocated from one side of the Rockawalkin Creek to the other - the road remains closed for a significant period of time. 

    More
  • Historic Wye Grist Mill Floods, Thousands in Damages

    Historic Wye Grist Mill Floods, Thousands in Damages

    Flooding became a major problem at an historic building sitting between Talbot and Queen Anne's Counties last week. The over 300 year-old Wye Grist Mill once shipped thousands of barrels of flour during the American Revolution. The mill still grinds flour to this day, but it make stop operations and public tours into its basement after flooding late last Thursday.

    More

    Flooding became a major problem at an historic building sitting between Talbot and Queen Anne's Counties last week. The over 300 year-old Wye Grist Mill once shipped thousands of barrels of flour during the American Revolution. The mill still grinds flour to this day, but it make stop operations and public tours into its basement after flooding late last Thursday.

    More
Powered by Frankly

All content © Copyright 2000 - 2018 WBOC. All Rights Reserved. For more information on this site, please read our Privacy Policy, and Terms of Service, and Ad Choices