Delaware Professional Corporation – A Guide For Practitioners

What is a Delaware professional corporation?

A professional corporation in Delaware is a special entity that can only be established, owned, and run by state-licensed professionals to provide professional services (e.g., architects, accountants, engineers, doctors, lawyers, and teachers).

While it’s not necessarily a requirement to form a professional corporation to practice your services, doing so may bring certain benefits in terms of taxes, liabilities, financing, and other matters.

There are some key differences between a professional corporation and a regular business corporation in Delaware. For instance, you must be licensed to provide the professional services that will be offered by your corporation. In contrast, a regular business corporation can be formed by any legal entity or individual.

Along with that, your articles of incorporation must state that your corporation is formed for the purpose of providing professional services, while a regular corporation does not need to state any specific purpose.

Lastly, your shareholders, directors, and officers must be licensed to provide the services that the corporation offers. This is not the case for regular business corporations.

What are the pros and cons to consider?

In Delaware, there are certain benefits and drawbacks to forming a professional corporation. This section will discuss some of the key factors to consider before making your decision.

Pros of Delaware professional corporations

Below are some of the benefits you can get from a professional corporation.

• Limited liability protection for professionals

As a professional, you’re at constant risk of malpractice suits and other liabilities. So by forming a professional corporation, you can protect your personal assets from these potential risks.

• Tax benefits

The tax rate applicable may be higher if you operate under the sole trader and partnership structure, but your earnings are allowed to be retained and taxed at a lower rate with a corporation.

You can also break free from corporate taxes on interest or investment income with a Delaware corporation. On a state level, earnings from fixed investments or equity capital are not subjected to tax.

In addition to these benefits, corporations in Delaware are exempt from many other taxes, including those on capital gains or stock transfers, unitary tax, inventories, and value-added taxes (VAT) on commercial activities.

Forming corporations in Delaware helps to solve thorny tax-related problems and allows you to hone in on growing your business.

• Ease of fundraising for professional

For professionals that need substantial capital requirements to operate, such as dentists, pharmacists, or veterinarians, raising funds in a corporation with lower tax rates will accelerate the ability to pay for capital expenditures.

Professionals that seek to grow and extend their practice may have additional fundraising choices if they do so under a corporate framework. Due to the legal safeguards and protection it may offer, many investors and venture capitalists are more inclined to invest in professional corporations.

Cons of Delaware professional corporations

Though highly compatible with licensed professionals, corporations are not without certain limitations.

• Strict license requirements

Only professionals with licenses from the state to practice certain services may establish a professional corporation. For instance, if your corporation is made up of a group of attorneys, they must all be licensed to practice their expertise in Delaware.

More importantly, a professional corporation is not allowed to have dual practices. That is, if your business is set up for the purposes of providing legal services, you may not offer other professions such as accounting, real estate agents, insurance agents, or investment counselors.

• Stringent ongoing regulations

Professional corporations are subject to additional rules and regulations set forth by the state, which may demand higher compliance efforts on your part. There will be annual accounting and tax returns as well as annual minutes and resolutions to prepare. While your corporation may be deductible for tax purposes, you will need to carefully weigh the benefits of a reduced tax burden against the extra regulations.

• Higher operation standards

Running a professional corporation means you may be held to a higher standard in terms of the quality of services, which could require additional time and expense to maintain.

Steps to form a Delaware professional corporation

If you’ve decided that starting a professional corporation is right for your business, there are a few steps you’ll need to take to get started.

Step 1: Choose a corporate name

It’s important to choose a name that will be easily recognizable and reflective of the services you offer and compliant with the Delaware General Corporation Law. Below are several criteria for a Delaware corporation name:

Be unique and different from other existing names under records of the Delaware Division of Corporations

Do not include misleading terms or indications of your service. You cannot use the words “consulting firm” unless your corporation provides consulting services. Financial terms such as “bank,” “brokerage,” or “investment” are not allowed either.

Contain the words “professional corporation,” “P.C.,” “professionals,” or “corporation.

Step 2: Pick a Delaware registered agent

Your Delaware professional corporation is required to have a registered agent to receive and forward important legal documents on behalf of your business.

Your registered agent must be an adult who is a Delaware resident and physically located in the state.

Step 3: Prepare and file the Certificate of Incorporation

The Certificate of Incorporation is the document that officially forms your professional corporation as a legal entity.

You can file the document online or by post via the Secretary of Delaware including required information such as the company’s name, registered agents, business purposes, shareholders’ details, and so on.

Step 4: Establish your corporate bylaws

Bylaws are an important part of your Delaware professional corporation and should be carefully crafted to reflect the specific needs of your business. Your bylaws should include provisions such as the number of directors, how often board meetings will be held, what quorum is needed for decisions, and other operational procedures.

It’s important to have your bylaws in place before you start doing business as they will provide a clear framework for running your corporation.

What are the cost and time associated?

In terms of cost and time related to your incorporation, the 3 key areas to consider are incorporation, tax payment, and annual report.

Incorporation

To incorporate your professional corporation, you must file a Certificate of Incorporation with Delaware’s Secretary of State (SOS), along with the required fee.

The filing fee is determined by the number of stocks you own, typically between US$100 and US$250.

Fees fluctuate, so visit the SOS’s website for the most up-to-date cost schedule.

The incorporation process usually takes about two to three weeks. However, it’s important to allow for additional time if there are any complications with your application. You can pay an additional charge to expedite the paper-handling process within 24 hours.

Tax payment

In Delaware, there is no state tax on professional corporations. You will, nevertheless, be required to file a franchise tax return and pay franchise tax on an annual basis (except for exempted domestic corporations). Normally, the amount ranges from US$175 to US$1,000. Your annual franchise tax is due by March 1st of each year.

Annual report

You must pay annual report filing fees, which range between US$50 and US$200 by June 30th of each year.

Jump-start your Delaware professional corporation with ease

Now that you know how to form a Delaware professional corporation and the steps involved, you may be wondering how to get started.

The good news is that incorporating your business in Delaware is easier than you may think. BBCIncorp can help you get started on the right foot with our Delaware Company Formation. Our comprehensive package includes everything you need to get your business up and running. Feel free to drop us a message via service@bbcincorp.com or chat with our consultant for actionable advice.

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