Duke Energy, BoA, First Citizens: Why do many NC companies incorporate in Delaware?

Duke Energy, Krispy Kreme and Bank of America have their headquarters in Charlotte, but they all incorporated in another state. Same goes for homegrown Raleigh tech firms Pendo, Bandwidth and, until it was acquired by IBM, Red Hat.

Raleigh’s First Citizens Bank made headlines for its acquisition of Silicon Valley Bank, but First Citizens is actually registered far outside the Triangle.

Many of North Carolina’s most well-known companies aren’t, in a sense, North Carolina companies. Like thousands of firms based around the country, they incorporate in Delaware.

The small coastal state maintains a national reputation as the place companies form. Delaware has more business entities (1.8 million) than residents (1 million). It is home to two-thirds of Fortune 500 companies. In 2021, more than 90% of U.S. initial public offerings were registered in the state.

“I come from the corporate capital of the world,” President Joe Biden said during his recent visit to Durham. “More corporations are incorporated in Delaware than every other state in the union combined.”

Startup founders in North Carolina say investors treat a Delaware incorporation as a prerequisite to give money. Clerky and StripeAtlas, two popular platforms entrepreneurs use to establish companies, both fix Delaware as their only location.

Businesses don’t need to have a real presence in Delaware to incorporate there. The law requires them to hire a registered agent who lives in the state and to pay an annual state franchise tax. But even visiting the state isn’t necessary.

So, why Delaware? Can North Carolina do more to get companies to incorporate here? And does it matter?

What makes Delaware a corporate hot spot?

In short: courts, taxes, privacy and laws.

Many applaud the state’s corporate statutes, the Delaware General Corporation Law, for being dynamic yet predictable.

The Delaware legislature allows the Delaware Bar Association to annually review these laws for potential revisions. And under the state constitution, corporate laws can only be changed by a supermajority in the legislature, insulating the statutes from standard partisanship.

“Having clarity on what the rules are makes the game easier to play,” said Lawrence Hamermesh, a corporate law professor at Widener University in Delaware. “The statute is broadly enabling, in the sense that it authorizes a wide, indeed almost unlimited range of internal governance structures.”

By incorporating in Delaware, companies also gain access to its business court, the Delaware Court of Chancery, which has established a wide breadth of case law since the state adopted its general corporate statutes in 1899. By comparison, the North Carolina Business Court was only created in 1996.

Delaware’s corporate courts don’t have jury trials, which adds to the predictability of case outcomes.

“People are familiar with Delaware corporations,” Hamermesh said. “And they get that way from the time they’re in law school, because that’s what corporate law is taught in law schools around the country. It’s all accepted.”

Duke Energy spokesperson Neil Nissan told The News & Observer the utility company incorporates in Delaware for its “well-established records on corporate laws” and “the state’s tax characteristics for both the corporation and our shareholders.”

Jason Caplain, general partner and cofounder of Bull City Venture Partners, said every company in his Durham fund’s portfolio files as a Delaware C corporation.

“There are many advantages including tax and liability,” he said. “Delaware C corporations also allow for two classes of stock and for stock options, which are used by companies to provide additional incentive to employees. Additionally, Delaware is really fast for filings and case law is very mature and understood.”

Delaware actually maintains an 8.7% corporate income tax rate, which is higher than in many states (including North Carolina), but out-of-state companies that don’t do business in Delaware aren’t required to pay. And there is no inheritance tax on stocks owned by non-state residents.

The “Delaware loophole”

Delaware law also affords companies greater privacy, or — depending on how you look at it — secrecy.

When a Delaware firm files financial reports, only the name of its registered agent and a contact person must be disclosed, allowing executives and shareholders a layer of anonymity if they desire.

Some have criticized this policy for establishing “the Delaware loophole,” which allows companies to create opaque shell companies to store what would otherwise be taxable assets in other states.

“Companies can set up a Delaware holding company, and because intangibles, like trademarks, are not taxed in Delaware, then they can funnel profits via that holding company and thereby avoid paying state tax,” said Hal Witzman, a University of Chicago adjunct professor and author of the book “What’s the Matter with Delaware? How the First State Has Favored the Rich, Powerful, and Criminal — and How It Costs Us All.”

During a podcast in June, Witzman described the Delaware loophole as “an elegant tax dodge.”

Do NC companies need to incorporate in Delaware to succeed?

In many cases, no.

While Bank of America and Duke Energy file in Delaware, others like Lowe’s and Truist Bank incorporate in North Carolina. Many Triangle companies register locally too, including the Durham semiconducting chip manufacturer Wolfspeed, which President Joe Biden recently visited.

“From a purely corporate standpoint, generally speaking, what we tell our clients is there really is no practical difference (to incorporating in Delaware) in terms of privacy, in terms of the treatment of law, in terms of taxation,” said William Bray, a founding partner at the Charlotte business law firm Bray & Long.

The North Carolina Business Court doesn’t have the same history as the Delaware Court of Chancery, but Bray’s partner Jeff Long said the Tar Heel court has grown in both size and stature.

“I think its growth is evidence that lawyers and individuals have grown more confident and comfortable in going to the Business Court to have their matters heard,” he said.

In 1996, a judge named Ben Tennille launched the North Carolina Business Court from a modest courthouse office in High Point. Since then, the court has added four more judicial positions and today has offices in Charlotte, Winston-Salem, Greensboro and Raleigh.

North Carolina General Statutes entrusts the business court “to hear and decide complex business cases.” Over the past three years, the court has taken on 344 new cases according to its latest legislative report.

Some in Delaware have taken notice.

“North Carolina, with its business court, has done I think the most of any other state to at least approach the institutional advantages that Delaware has in its Court of Chancery business court,” Hamermesh said. “But outside of North Carolina, I don’t think people learn North Carolina corporate law.”

According to data provided by the North Carolina Department of the Secretary of State, the state has seen a 70% increase in new business formations since 2019.

But do investors demand Delaware incorporation?

Many times yes, though not always.

When North Carolina companies seek money or mergers, those with the money often say a Delaware incorporation is essential.

“It’s pretty much part of the basic checklist if you want to raise venture capital,” said Scot Wingo, a Triangle investor who founded the mobile car care startup Get Spiffy.

Peter Goldstein, a Raleigh resident who cofounded the San Francisco-based software firm Valimail, said companies stand to lose out if they buck convention and incorporate outside of Delaware.

“You are trying to be as normal as possible,” he said. “You want the (mergers and acquisitions) team from your potential acquirer or the deals team from an investor to look at you and say, ‘You look like every other deal I’ve done from a financial structure perspective. You fit in the square.’”

Bill Spruill, a prominent Raleigh entrepreneur and investor, pushed back on Delaware incorporation being “the absolute” for startups.

And he would know. Last May, Spruill completed one of the most profitable exits in Triangle history when Global Data Consortium, a company he cofounded a decade prior, was acquired for $300 million.

“Being a North Carolina corporation was just fine for my business,” he said. “It didn’t prevent us, arguably, from raising capital. It doesn’t prevent you from executing at all on your business.”

Does NC lose out when its companies incorporate in Delaware?

A direct way North Carolina is affected by Delaware’s corporate stature is in missed revenues.

The North Carolina secretary of state charges businesses $125 to incorporate. Then each year, business corporations and limited liability companies must file annual reports that cost $23 and $200 online respectively. It might not add up to much relative to the state budget, but it is something.

Some bankruptcy lawyers in North Carolina mentioned they miss out on potential clients who are based locally but incorporate in Delaware. And critics of Delaware’s corporate laws, like Witzman, argue that all states stand to lose out on tax revenue so long as the “Delaware loophole” remains open.

But overall, many say the impact on the Tar Heel State is minor.

“We see minimal impact,” said Liz Proctor, spokesperson for the N.C. Secretary of State. “North Carolina has spent decades building a strong infrastructure for business that supports a top-ranked business climate and economy, according to many industry publications. In North Carolina, we continue to use short turnaround times for formation and open and free access to corporate information as a competitive advantage.”

As Zach Milburn, CEO of the Raleigh home building startup Nomad, pointed out, “incorporating somewhere and being headquartered somewhere is completely different.”

“I’ve never been to Delaware in my life,” he said.

This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work.

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