A Q&A guide to doing business in the US: Delaware.
This Q&A gives an overview of the legal system; foreign investment, including restrictions, currency regulations and incentives; and business vehicles and their relevant restrictions and liabilities. The article also summarises the laws regulating employment relationships, including redundancies and mass layoffs, and provides short overviews on competition law; data protection; and product liability and safety. In addition, there are comprehensive summaries on taxation and tax residency; and intellectual property rights over patents, trade marks, registered and unregistered designs.
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Delaware has a common law system.
Delaware does not impose restrictions on foreign investment.
Delaware does not impose exchange control or currency regulations.
Delaware does not have grant or incentive programmes specifically for foreign investors. However, foreign investors may be able to participate in grants and incentives available to investors generally, including programmes such as:
The Delaware Competitiveness Fund.
The Delaware Strategic Fund.
The most common business vehicles used are corporations and limited liability companies.
A corporation is formed by filing a certificate of incorporation with the Secretary of State of Delaware. A limited liability company is formed by filing a certificate of formation with the Secretary of State of Delaware and entering into a limited liability company agreement. Filing can be completed within one day.
Delaware does not impose minimum or maximum limits on share capital.
A corporation's shares can be issued for non-cash consideration. Members of limited liability companies can also make contributions in non-cash consideration, subject to provisions in the limited liability company agreement.
Restrictions on rights attaching to shares. The rights, powers and preferences of shares must be set out in a corporation's certificate of incorporation. The rights, powers and preferences of limited liability company interests must be set out in the limited liability company agreement. If the certificate of incorporation or limited liability company agreement fails to set out these matters, the General Corporation Law of the State of Delaware (8 Del C § 101 et seq) and the Delaware Limited Liability Act (6 Del C § 18-101 et seq) provide default rules.
Automatic rights attaching to shares. Unless otherwise provided in the certificate of incorporation or otherwise validly restricted, shareholders automatically have the right to:
Vote.
Notice of meetings of shareholders.
Transfer shares.
Participate in dividends declared by the board of directors.
Inspect the stock list and other books and records of the corporation.
Participate in the residual value of the corporation on dissolution.
Delaware does not impose restrictions on foreign shareholders or limited liability company members.
Unless the certificate of incorporation provides otherwise, a Delaware corporation is managed by, or under the direction of, its board. A Delaware limited liability company can be managed either by its members or by a manager, depending on what the limited liability company agreement provides. There are no co-determination rules or citizenship requirements for management of either a Delaware corporation or Delaware limited liability company.
Delaware does not impose restrictions on the appointment of foreign managers or require managers to be local.
Directors of corporations and managers of limited liability companies are fiduciaries and can be held liable for breach of fiduciary duty. Directors can also be liable for the unlawful payment of dividends or unlawful share purchases or redemptions. Companies can include a provision in the certificate of incorporation limiting liability for breach of fiduciary duty, except for liabilities arising from:
Breaches of the duty of loyalty.
Acts not taken in good faith.
Unlawful dividends or share repurchase or redemption.
Acts from which the director derived an improper personal benefit.
Limited liability company managers can be protected from personal liability in the limited liability company agreement.
Parent companies are not liable for the acts of their subsidiaries except in circumstances where the corporate veil can be pierced.
Delaware does not require corporations to file accounts publicly, but a short annual franchise tax report is due annually. The filing fee for the report is US$50 (as at 1 November 2011, US$1 was about EUR0.7), which is payable with the franchise taxes.
Employment is regulated by statute and common law. The Delaware Department of Labor enforces employment statutes and investigates discrimination charges, and wage and hour violations. The principal state employment laws are the:
Discrimination in Employment Act (19 Del C § 710 et seq), applicable to employers of four or more persons, which prohibits employment discrimination on the grounds of:
race;
colour;
age;
religion;
sex;
sexual orientation;
national origin;
genetic information;
marital status.
Handicapped Persons Employment Protection Act (19 Del C § 720 et seq), applicable to employers of 15 or more employees, which prohibits discrimination against disabled persons.
Wage Payment and Collection Act (19 Del C § 1100 et seq), which regulates payment of wages and benefits.
Employers cannot require polygraph examination as a condition of employment or continuation of employment (19 Del C § 704).
These laws apply to foreign employees working in Delaware. Their applicability to Delaware employees working abroad depends on a number of factors including the law, if any, governing the employment contract.
A written contract can provide that Delaware or some other law applies to the contract. Certain laws can apply irrespective of the choice of law in the employment contract, but the scope of such application has not been defined by statute or case law.
Written employment contracts are not required. However, employers of four or more employees must provide employees with written notification of:
The rate, time and place of payment.
Written notice of employment fringe benefits and policies.
Written notice of any reductions in the rate of pay, and any changes in the day, hour or place of payment or benefits.
A pay statement showing the:
amount of wages due;
pay period covered by the payment;
amounts and deductions made from wages;
total number of hours worked in the pay period (for employees paid on an hourly basis).
Every employment relationship includes an implied duty of good faith.
Foreign employees must have work permits under federal law. There is no supplemental Delaware state law.
Employees are not entitled to management representation and/or to be consulted in relation to corporate transactions.
Delaware is an employment-at-will state; the employee and the employer are free to terminate the employment relationship, at any time, with or without notice and with or without cause. Severance payment is not required unless the employer voluntarily has such a policy. However, there are some general exceptions:
Certain federal and state anti-discrimination laws restrict discriminatory or retaliatory dismissal.
The Delaware Whistleblowers Protection Act (19 Del C § 1700 et seq) prohibits dismissing, threatening, or otherwise discriminating against an employee for:
refusing to violate federal, state or local law;
reporting such a violation; or
participating in an investigation of such a violation.
An employer must not discharge an employee for:
filing a worker's compensation claim (19 Del C § 2365);
refusing to take a polygraph test (19 Del C § 704).
The implied covenant of good faith can be a basis for wrongful dismissal claims, limited to:
violations of public policy;
misrepresentation by an employer of a material fact;
an employer's use of superior bargaining power to withhold past remuneration;
falsifying records to create fictitious reasons for dismissing an employee.
The remedies available to employees if the above rules are not followed vary by statute, but can include:
Actual damages.
Back wages (the difference between what the employee was paid and what the employee should have been paid) and front wages (the salary lost between the judgment and reinstatement or, if reinstatement is not feasible, instead of reinstatement).
Punitive damages.
Penalties.
Lawyers' fees and interest.
Reinstatement.
Injunctive orders.
Redundancies and mass layoffs are not regulated by state law.
Tax residency in Delaware arises from either:
Domicile in Delaware (domicile can be loosely defined as a single place of permanent residence).
The maintenance of a place of abode in Delaware, plus presence in Delaware for more than 183 days in the taxable year.
Tax resident employees are subject to Delaware income tax on their worldwide income, at rates between 2.2% and 6.95%. Social security contributions and other federal taxes are regulated by federal law. A tax resident may be entitled to a credit against Delaware income taxes with respect to taxes paid to other jurisdictions on income earned outside Delaware.
Non-tax resident employees are only subject to Delaware income tax on their Delaware source income, at rates between 2.2% and 6.95%. Social security contributions and other federal taxes are regulated by federal law.
Employers must withhold Delaware income tax from amounts paid to resident employees and non-resident employees who are subject to Delaware income tax and pay the amount withheld to the Delaware Division of Revenue. Social security contributions and other federal taxes are regulated by federal law.
A corporation or other taxable entity is only subject to Delaware income tax on the portion of its income allocated or apportioned to Delaware. Partnerships and certain other types of pass-through entities are not subject to Delaware income tax at the entity level (see Question 15).
A corporation is subject to the following taxes:
Corporate income tax. A corporation is only subject to Delaware corporate income tax on income from Delaware sources, or income apportioned to Delaware, at 8.7%, regardless of the jurisdiction of its incorporation or tax residence.
Gross receipts tax. A corporation doing business in Delaware with receipts from Delaware sources is subject to Delaware gross receipts tax at various rates depending on the nature of the business conducted in Delaware.
Corporate franchise tax. A corporation incorporated under the laws of Delaware is also subject to an annual corporate franchise tax.
No Delaware income tax is imposed on a limited liability company classified as either a partnership or disregarded entity for US federal income tax purposes. Any limited liability company which is engaged in business in Delaware, regardless of the jurisdiction of formation or tax residence, is subject to Delaware gross receipts tax on receipts from Delaware sources. The rate upon which Delaware gross receipts are taxed varies based on the type of business but generally is less than 1%.
The Delaware taxation of corporations and limited liability companies depends on their sources of income and gross receipts, not jurisdiction of incorporation, or tax residence (see Question 14).
Dividends paid to foreign corporate shareholders?
Dividends received from foreign companies?
Interest paid to foreign corporate shareholders?
Intellectual property (IP) royalties paid to foreign corporate shareholders?
Delaware does not impose a withholding tax on dividends paid to a corporation's shareholders. In general, a shareholder that is not otherwise subject to income tax in Delaware is not subject to Delaware tax on a dividend received from a corporation doing business in or incorporated under the laws of Delaware.
A corporation doing business in Delaware must include, in its Delaware taxable income, dividends received from a foreign corporation, unless foreign tax is:
Paid.
Deemed paid.
Accrued under applicable provisions of the US Internal Revenue Code.
A limited liability company that is classified as a partnership or disregarded entity for federal income tax purposes is not subject to Delaware income tax at the entity level on dividends it receives from a foreign corporation.
Delaware does not impose a withholding requirement on interest paid to a corporation's shareholders.
Delaware does not impose a withholding requirement on IP royalties paid to a corporation's shareholders.
Delaware does not impose thin capitalisation rules.
Delaware does not impose controlled foreign company rules.
Delaware does not impose transfer pricing rules.
Delaware does not tax imports or exports.
Delaware, as a state-level jurisdiction within the US, has no tax treaties with non-US jurisdictions or double tax treaties with other states in the US. Rather, in the case of individual taxpayers, double taxation is minimised by providing credits against Delaware taxation for taxes paid in other states. In the case of corporate taxpayers, double taxation is minimised through allocation and apportionment rules related to the income of corporations engaged in multi-state business (see Doing Business in... United States for information on double tax treaties).
Contracts, business combinations and conspiracies in restraint of trade are prohibited (Delaware Antitrust Act (6 Del C §§ 2101-2114)). The statute provides that it shall be construed in harmony with judicial interpretations of comparable federal antitrust statutes.
Delaware does not separately regulate unilateral (or single-firm) conduct as a matter of competition law. This regulation exists at United States federal level.
Delaware does not separately impose merger control regulations on mergers and acquisitions as a matter of competition law. Such merger control regulations are imposed at the United States federal level.
Nature of right. Patents are regulated by federal law. There is no state patent law.
Protection. Patents are registered with the United States Patent and Trademark Office.
Enforcement. Patents are typically enforced by infringement proceedings in federal courts.
Length of protection. Patents typically protect inventions for 20 years from the earliest filing dates.
Nature of right. Trade marks and service marks are words, names, symbols, devices or any combination of these used to identify goods or services, and which can be used to distinguish goods or services of the holder of the mark from those of other persons (6 Del C § 3302).
Protection. In addition to federal trade mark law, the Delaware Trademark Act (6 Del C §§ 3301-3315) allows a person to register a mark with the Secretary of State of Delaware.
Enforcement. Trade mark enforcement under the Delaware Trademark Act is by court proceedings for injunctive relief or damages (6 Del C § 3314).
Length of protection. Protection for registered marks under the Delaware Trademark Act lasts for ten years from the date of filing, renewable for successive ten-year periods. Protection for unregistered trade marks lasts for as long as the mark is used continuously in commerce (6 Del C § 3306).
This is the same as for trade marks (see above, Trade marks).
Nature of right. Words, names, symbols and devices used to identify goods and to distinguish them from the goods of others that are not registered trade marks can be protected under the Uniform Deceptive Trade Practices Act (6 Del C §§2531-2536).
Protection. The Act regulates activities such as:
Passing off goods and services as those of another.
Making false representations in connection with goods offered to the public.
Deceptively advertising goods for sale with intent not to deliver or to adequately supply reasonable demand for those goods.
Enforcement. The Act provides for injunctive relief and the payment of attorneys' fees (6 Del C § 2533).
Length of protection. Protection for unregistered marks lasts for as long as the mark is used continuously in commerce.
Copyright is regulated by federal law. There are no Delaware copyright laws.
Nature of right. Delaware has adopted the Uniform Trade Secrets Act (6 Del C §§ 2001-2009). Trade secrets include any information that derives independent economic value from not being generally known, and is the subject of reasonable efforts to keep it secret (6 Del C § 2001).
Protection. Trade secrets are protected automatically. There is no requirement to register them.
Enforcement. Trade secret enforcement is by court proceedings for injunctive relief, damages and attorney's fees (6 Del C § 2004).
Length of protection. Protection lasts for as long as the information remains a trade secret, but an action for misappropriation must be brought within three years after the misappropriation is, or reasonably should have been, discovered.
Delaware has no specific laws relating to agency relationships in the marketing agreement context.
Delaware provides statutory protection for retail sellers in distribution arrangements, including laws protecting retail sellers of motor fuel (Retail Sales of Motor Fuel, 6 Del C § 2901, et seq) and provisions applicable to equipment dealers and their suppliers (Equipment Dealer Contracts, 6 Del C §§ 2720-2727).
Delaware's Franchise Security Law (6 Del C § 2551, et seq) gives franchised distributors the right to advance notice of termination, and sets out restrictions on excessive payments made to franchisers and certain other statutorily defined remedies. Delaware also has a comprehensive statutory framework regulating motor vehicle sales franchises (Motor Vehicle Franchising Practices, 6 Del C § 4901, et seq).
Delaware's Uniform Electronic Transactions Act (6 Del C §§ 12A-101 to 12A-117) regulates e-commerce. The Act:
Provides that an electronic signature satisfies the legal requirement of a signature (6 Del C § 12A-107).
Addresses contract formation between persons and electronic entities by specifically recognising the existence of an enforceable contract, even where it is created by interaction of the parties' electronic agents or interaction between an electronic agent and individual (6 Del C §§ 12A-114).
Addresses evidentiary problems (such as the statute of frauds and the best evidence rule) that could arise due to the non-tangible nature of the medium (6 Del C §§ 12A-107, 113).
Delaware imposes criminal penalties for unauthorised interception, access or theft of data from computer systems. Injunctive relief and restitution are also available (11 Del C §§ 931-941).
Delaware does not recognise strict liability in product liability actions, but applies the warranty provisions of the Uniform Commercial Code and general negligence principles as follows (Cline v Prowler Indus. of Md., Inc, 418 A.2d 968 (Del 1980)):
Warranties. A claimant can bring a claim for breach of:
an express warranty;
an implied warranty of fitness for a particular purpose;
an implied warranty of merchantability.
The claimant must prove the existence of the warranty and that the defendant breached it (6 Del C §§2-313 to 2-316, 2-718 to 2-219).
Negligence. To proceed under a negligence cause of action, the claimant must prove that both:
the defendant failed to exercise the care of a reasonably prudent manufacturer under the circumstances (Franchetti v Intercole Automation, Inc, 529 F Supp 533 (D Del 1982));
the manufacturer's breach caused damage to the claimant.
Strict liability may exist for lease-bailment transactions and defective products distributed in non-sale, promotional situations (Martin v Ryder Truck Rental, Inc., 353 A.2d 581 (Del 1976)).
There are additional statutory provisions applicable to product liability cases, such as statutes of limitations for bringing such actions (6 Del C § 2-201).
T +1 302 651 7752
E Nolen@rlf.com
W www.rlf.com
Qualified. Delaware, 1979
Areas of practice. Corporate litigation.
Recent transactions
T +1 302 651 7707
E sstevenson@rlf.com
W www.rlf.com
Qualified. Delaware, 1995
Areas of practice. Taxation; ERISA/employee benefits; tax-exempt organisations.
Recent transactions
Advises both national and local clients with regard to matters of US federal income taxation, ERISA/employee benefits and matters of Delaware income, franchise, gross receipts, realty transfer taxation and unclaimed property, including representing clients before the Delaware Division of Revenue, the Delaware Tax Appeal Board, the Delaware State Bank Commissioner and the Internal Revenue Service.
T +1 302 651 7509
E cottrell@rlf.com
W www.rlf.com
Qualified. Delaware, 1988
Areas of practice. Intellectual property; alternative dispute resolution; general litigation.
Recent transactions
T +1 302 651 7568
E jauffret@rlf.com
W www.rlf.com
Qualified. Delaware, 1998; Pennsylvania, 1998
Areas of practice. General litigation; labour and employment.
Recent transactions
