The past 150 years has seen corporations rise and become the main social institution for doing business in America and across the globe. During the eighteenth and early nineteenth centuries America was marked by individually owned family oriented businesses. This framework began to change with the economic growth in both America and Europe during the period between the Civil War and World War I. A system once driven by granting charters seen as privileges has evolved into a complex system beyond the understanding of any one person. This complexity often translates into irregularities and loopholes in corporate law. This paper will examine the situations in which individuals and corporations take advantage of these loopholes to their own advantage. What we will find is that individuals and corporations exploit loopholes in corporate law by means of corporate friendly states like Delaware, Nevada, and Wyoming, to evade taxes in other states, and in extreme cases, money launder. As a result this that the state corporate income tax (CIT) has been on a steady decline over time in terms of total tax revenue percentages putting more strain on states already burdened by the economic crisis (Brunori).
More businesses incorporate in Delaware than in any other state (“Division of Corporations”). Over half of the Fortune 500 companies are incorporated in Delaware (Vinzant). In total, it comprises of more than 6,500 companies (Browning). Until 1918 the corporate state was New Jersey. This came to an end when the state’s then new governor, Woodrow Wilson, toughened up the laws opening up the window for a new state to take the position. This has state has undoubtedly been Delaware.
There are two significant reasons why businesses chose to incorporate in Delaware more than any other state. The first is the Delaware General Corporation Law, which is the statute concerning corporate law in Delaware. It is considered to be one of the most flexible and advanced corporate statues in America (Black). The second is Delaware’s corporation court, the Chancery Court. The specialized Chancery Court of Delaware handles only business cases and are heard only by judges; no juries (Black). Furthermore, the court has accumulated precedent since 1792 making its decisions predictable which appeals to business officials (Vinzant). There are other less tangible qualities about Delaware that can help lure in businesses, but the laws and the court are the main attractors.
The significance of the Delaware General Corporation Law lies in what are known as holding companies, or shell companies. Delaware’s corporate law is one of only three that allow for their creation. The other two states are Nevada and Wyoming. Holding companies are corporate subsidiaries that have ownership of the major corporation’s patents, trademarks, and investments. Of the 6,500 companies in Delaware more of them are these holding companies (Lynnley).
Holding companies are popular in part because of...