The Pros and Cons of Incorporating in Delaware

Incorporation in Delaware is the process of forming a Delaware Corporation. A corporation is a legal entity created by state statute, and it is recognized as separate from its members, even though it exists to serve them.

Corporations are also subject to regular reporting requirements, both as an organization and on behalf of individual shareholders.

Incorporating or forming a company involves applying for a corporate charter from the Delaware Secretary of State.

Once you have incorporated in Delaware, you will be required to obtain a Taxpayer Identification Number from the Internal Revenue Service and file regular reports with the IRS and the State of Delaware.

What Are the General Requirements for Delaware Corporations?

  • A corporation has no fewer than one and no more than 50 directors, all of whom must be residents of the U.S. or the state in which the corporation is incorporated.
  • In most cases, the board of directors must be composed of no less than one member from each class of stock. There are exceptions for corporations with fewer than one thousand shares of stock outstanding; other exceptions are allowed by law.
  • A Delaware corporation must file an annual report with the Delaware Secretary of State within 60 days after the end of its fiscal year, which ends on December 31. The report must give a detailed account of the company’s business transactions, with the details of its financial condition. It must include balance sheets, income statements, and other financial information.
  • A Delaware corporation must annually file an Annual Statement with the Delaware Secretary of State within 60 days after its fiscal year ends, which shows the company’s balance sheet, income statement, and cash flow analysis, along with any other information required by law.
  • The corporation must not have a surplus of funds or undistributed profits at the end of the corporation’s fiscal year.
  • Each shareholder must consent to the appointment, remuneration, and removal of directors by filing one or more shareholder agreements.
  • Corporations can be formed in Delaware only if:
  1. they are organized for specified purposes, such as to engage in specific activities authorized by law;
  2. they do not have any regular business operations in another state;
  3. they have no other permanent place of business within the state.
  • A corporation can operate only in the state in which it is incorporated.
  • The corporation’s shares must not be transferable, and its capital must be paid up in full.
  • Corporations are subject to ordinary federal and state income taxes under the same rules as individuals.
  • The corporation is liable for any federal and state taxes due by third parties unless those parties have received a valid and timely written waiver of liability from the corporation.
  • Corporations are subject to annual franchise taxes.
  • A corporation is not a legal entity and, as such, cannot own assets, incur debt or enter into legal agreements.
  • Shareholders of a corporation are personally liable for all of the company’s debts and liabilities up to the fair value of their shares.

How to Form a Corporation in Delaware

The procedure to incorporate a Delaware company is fairly straightforward and cost-effective, and there is no corporate income tax in Delaware.

The first step is to choose the business name and prepare a certificate of incorporation in accordance with Section 109 of the Delaware General Corporation Law (DGCL).

Put simply, the certificate of incorporation states that “there will be a corporation” and sets forth all of the corporation’s rights, powers, features, and restrictions.

Step 1. Name the Company

The name of a Delaware corporation is formed by the legal name of the company followed by the names “Delaware” and “Corporation.” The word “Delaware” means the State of Delaware and not any other state.

For example, ABC Corporation is a Delaware corporation, and ABC Derivative Delaware Corporation would be different.

Step 2. Choose Your Share Structure

Generally, shareholders own stock in a corporation. Stock can be either common or preferred, and there are different rules governing each.

The stock allows an owner to vote on issues such as the election of directors or management pay decisions. A shareholder also may receive dividends if the company has earnings or a surplus that exceeds its liabilities.

Step 3. Add the Directors

Shareholders elect the directors of a Delaware corporation at the annual meeting. The directors are charged with managing the corporation and making business decisions.

Step 4. Issue Stock

Each share of stock has voting and value.

In the event of a liquidation, each shareholder’s shares are subject to a value determination based on other shares held by the same shareholder but also other shareholders holding at least a majority of the total shares outstanding; in the event that there is no such other shareholder, or if all shareholders agree to concessions, shares must be assumed for sale on agreed-upon terms.

Step 5. Record Shareholder Agreements

The Delaware General Corporation Law requires that, in the event of a dissolution of a corporation, a shareholder agreement be in place for each class of stock held by the shareholders to avoid claims by other shareholders and the possibility of loss.

The shareholder agreements provide all matters related to security and release, dividends, and distributions.

Step 6. File Certificate of Formation

The certificate of formation is filed with the Secretary of State along with the articles of incorporation, a copy of the corporation’s charter, minutes from the previous year’s annual meeting, and a list of all shareholders.

Step 7. Determine IRS Tax Status

When a Delaware corporation files its current year’s tax return, it is required to report its income and deductions for the prior tax year.

Step 8. Apply for an Employer Identification Number

An EIN (Employer Identification Number) is a unique nine-digit number that is assigned by the IRS.

Step 9. Obtain Licenses and Permits

Depending on the business, a number of licenses may be required to operate a business in a certain area. The list below shows some of the most common:

  • Alcoholic Beverage Control License – Issued by the state’s Division of Alcohol and Tobacco Enforcement, this license allows businesses to manufacture and sell alcohol. Non-profit entities may not hold an ABC license.
  • Firearm License – Issued by the state’s Division of Fire Safety, this license allows businesses to manufacture, sell or transfer firearms. Non-profit business entities may not hold a firearms license.

How to File Certificate of Incorporation

After your Delaware corporation is formed, the next step is to file the Certificate of Incorporation.

The Certificate of Incorporation will be filed with the Delaware Division of Corporations, which acts as a repository for all corporate filings.

The filing fee for a domestic corporation ranges from $50 to $150, with an additional $25 to $75 charged for every twenty-five pages or fraction thereof of the articles. There is no application fee for a domestic corporation.

Enter the required information on the Delaware Certificate of Incorporation:

  • The name of the corporation
  • The names and addresses of all of the incorporators
  • The type or purpose of the corporation
  • The date of incorporation, the state where it was formed, and a brief description of its activities or purpose
  • A statement regarding how many shares are authorized by the articles. If, after filing, you change the number of authorized shares, you must file an amendment if your new number is greater than one hundred percent (100%) and no less than fifty percent (50%) more than your original number.
  • The names and addresses of the corporation’s officers and director
  • The signature of each incorporator or person signing the certificate of incorporation
  • A statement indicating whether or not shares are distributed to employees for incorporation services performed
  • Any other additional information as may be required by the Delaware legislature

What a Delaware Corporation is Not

  1. A corporation is not: a sole proprietorship or partnership; it is not an S corp; it is not a trust corporation; nor does it own real estate. A corporation does not have all the rights of an individual or the obligations of a business entity.
  2. The corporation itself cannot own real estate.
  3. A corporation has no right to privacy, although it does have some limited protection against harassment and invasion of privacy.
  4. The corporation is not a person and does not have free-speech rights or the ability to vote.
  5. A corporation can’t commit a crime, but its directors, officers, and employees can be charged individually for crimes committed within the scope of their employment with the corporation.
  6. A corporation can’t be pardoned for a crime.
  7. A corporation cannot be held in contempt of court of chancery.
  8. The corporation does not have the standing to bring suit on its own behalf, nor can it assign or delegate its rights to another individual or entity.

How Long Does it Take to Incorporate in Delaware?

For typical incorporation, it typically takes approximately one to two months from the date the corporation files its articles of incorporation with the Secretary of State until it is approved by the state.

The Pros and Cons of Incorporating in Delaware

The Delaware General Corporation Law is clear and concise. The laws are well known and followed by the Secretary of State, who makes it easy to incorporate in Delaware.

Delaware has no corporate income tax, which can be a huge plus for corporations seeking refuge from a higher-tax state.

Corporations incorporated in Delaware may also enjoy an exemption from the luxury car tax and sales tax on products purchased for resale or export to foreign countries.

The benefits of incorporating in Delaware

  • Strong Corporate Laws with no double taxation.
  • No state income tax.
  • Elimination of the cost of license or application fees.
  • No personal service tax.
  • The Delaware court system has a reputation for being quick, fair, and efficient in resolving disputes and is known for protecting shareholder rights.

The drawbacks of incorporating in Delaware

  • Filing fees are not prorated.
  • Corporations must pay a franchise tax each year, with the first franchise tax filing occurring on or before March 1st.

Are Delaware Corporations Advantageous for Small Businesses?

Delaware corporations are advantageous for small businesses because of the clear, concise, and specific laws related to these types of corporations.

It is also advantageous in the sense that there is no tax, which can mean huge savings for a corporation. Additionally, there are no corporate fees or licensing requirements to get started.

Delaware incorporation costs

The costs for incorporated entities in Delaware are extremely reasonable. For example, a corporation with a single shareholder and one employee will pay $800 to incorporate.

A corporation that is formed by filing articles of incorporation in Delaware, with four shareholders, along with an accountant, may cost as low as $1200.

Formation fees:

The formation fees for Delaware corporations do come at a cost. Fees are prorated, which means that the lower your share ownership in the corporation, the lower fee you will pay.

The state’s franchise tax has a flat rate of $300 per year. The first franchise tax filing occurs on or before March 1st.

Annual fees may be paid in installments, with the first installment due on or before March 1st and the remainder paid by September 30th.

  • S corporation would pay approximately $800 to incorporate.
  • LLCs cost approximately $1200.

Every Delaware corporation must file an annual report, which is due on or before March 1st. If the filing is not made by March 1st, the corporation will be subject to a penalty of between $25 and $100 for every 30 days late, up to a maximum penalty of $500.

Delaware corporation maintenance costs:

Annual report fees are due on or before March 1st. If the filing is not made by March 1st, the corporation will be subject to a penalty of between $25 and $100 for every 30 days late, up to a maximum penalty of $500.

The minimum annual report fee is $300, which covers one class of stock with a par value of no more than $1 per share.

Additional fees may apply for additional classes of stock valued over one dollar per share.

Can I have a corporation in Delaware if I live in a different country or state?

Yes. There are actually more than 8,000 corporations incorporated in Delaware which are located all over the world.

Other states with similar incorporation laws to Delaware:

“Incorporated”:

Although Delaware is generally regarded as having strong corporate laws, the following states also have similar incorporation requirements: Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois (outside Chicago), Massachusetts, Michigan (outside Detroit), Nevada, New Jersey (outside of New York City), North Carolina (outside Charlotte), Texas and Washington.

“Unincorporated Business Entity”:

A small business can also get started in states like New York and Pennsylvania by filing the proper paperwork to create an unincorporated business entity.

Many of these states have no franchise tax or state filing fees and are cost-effective for starting a new business.

State Fees:

Delaware – No corporate license fee for a Delaware corporation. Annual report fees are due on or before March 1st.

Delaware corporations are subject to a franchise tax, which includes the minimum annual franchise tax fee of $300. Additional fees may apply for additional classes of stock valued over one dollar per share.

Georgia – No state filing fees for a Georgia corporation.

Nevada – Nevada does not have any corporate filing fees, but the corporation will have to pay state taxes based upon its business type and revenues.

Should I incorporate in Delaware or start an LLC?

Forming a Delaware LLC is generally advantageous for small business owners because of the clear, concise, and specific laws related to this legal entity.

It is also advantageous in the sense that there are no state or federally imposed taxes, which means huge savings for the business.

Are Delaware corporations required to have bylaws?

There is no requirement for a Delaware corporation to have bylaws. However, bylaws are very helpful in setting the rules and regulations for your corporation.

Delaware corporations are only required to provide reasonable notice of proposed changes in the bylaws and must also provide that the members approve such changes.

Why incorporate with A Registered Agent Inc.?

A Registered Agent Inc. is a registered agent in Delaware that all of our clients trust to act as their Delaware Registered Agent or Delaware LLC Registered Agent.

What is a Registered Agent?

A Registered Agent is the individual or business entity that will be tasked with registering your corporation as well as serving as your point of contact during the duration of your incorporation in Delaware. This will include:

  1. Receiving important documents and official correspondence addressed to your corporation in Delaware.
  2. Acting on behalf of your company in taking care of the many filing and regulatory requirements that are required during the life of your incorporated entity.
  3. Communicating with your corporation or LLC in Delaware when you or your clients or partners are out of the office.
  4. Serving as a backup for your business if problems arise and the owners need to step out of the office for any reason.

There are many benefits to choosing a Registered Agent, including:

  • The ability to clearly communicate with your clients, customers, and partners by using email addresses and phone numbers that are properly registered at the Delaware secretary of state.
  • The ability to send certified mail, which is much easier for your clients to understand than regular mail.
  • The ability to serve as a backup or replacement if your Delaware Registered Agent Inc. Partner is out of the office for any reason.
  • The ability to use email, fax, and phone as the primary means of communicating with your clients and partners while other alternatives, such as snail mail, take much longer to deliver.
  • The ability to provide fast and reliable service in the event that you or a client or partner has questions regarding their Delaware Registered Agent or LLC Registered Agent status.

Where Should I Open My Business Bank Account?

It is crucial that you open your Delaware Corporation’s checking, savings, or CD’s account at a banking business institution with which you have a long-standing relationship.

It won’t be good to open your LLC bank account with a new bank and expect your clients and vendors to send checks to the incorrect bank.

Who Should I Contact to Apply for a Federal Tax ID Number?

You will need a Federal Tax ID number for your LLC in order to do business with other businesses, receive payments from customers and vendors and pay federal taxes.

It is recommended that you contact the Internal Revenue Service or the American Express Tax ID department to follow up on the process of obtaining an EIN (Employer Identification Number).

Once you have obtained your EIN, you can use it on all business documents just as if it was a social security number.

Delaware Incorporation Taxes

You may be surprised to learn that there are no state taxes imposed on your Delaware LLC. However, you will have to pay federal taxes.

The IRS requires every LLC to file their annual tax return, which is merely a form and a couple of hundred dollars in taxes, with the IRS, just as any other corporation would.

What Other Federal Taxes Should I Avoid?

Delaware does not have its own corporate income tax rate or corporate franchise tax rate as other states do.

Instead, the state imposes a corporate income tax rate on overall federal taxable income that is based on a formula that takes into consideration things like corporate size, income, and assets.

This means that if your corporation uses its office space as its primary asset, it will be taxed by Delaware just like other offices for the rental value of its buildings.

Is an Out-of-State Corporation Required to Form in Delaware?

No. Delaware recognizes other state’s corporations, but they must first form in their home state and incorporate using the laws of that state.

This is known as “foreign qualification,” and Delaware issues a certificate of “foreign corporation” when it approves an out-of-state corporation.

The foreign corporation must register with the Secretary of State to do business in Delaware within 60 days after it begins doing business here.

Conclusion

By choosing to incorporate in Delaware, you will be able to protect your business and ensure that you are following the law to the letter.

The state has been known for its easy incorporation rules and has also proven that it is a business-friendly environment.

You will need to choose a Delaware LLC Registered Agent Inc. partner who can take care of all of your Registered Agent service and all Delaware entity formation needs.

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