Although Delaware is the second smallest state in the US, it is the incorporation hub for corporation setup. Dupont, Integrity Staffing Solutions, W. L. Gore & Associates, among 67.8 % of top 500 Fortune companies incorporated in Delaware, also chose the state for its legal domicile.
If you are considering starting your corporation in Delaware, 12 Frequently Asked Questions below will help shed some light on how a Delaware corporation works.
1. What is Delaware corporation?
Delaware corporation is a legal entity registered in Delaware regardless where it conducts business. Delaware is considered a pro-business environment for startups, which helps Delaware be known as the best place to incorporate a business in the US.
2. Why would one form a Delaware corporation?
Forming a Delaware corporation gives many advantages to your business. Below are specific benefits you can expect from the incorporation in the state:
- Favorable taxation in terms of income tax, sales tax, property tax and tax on investment
- Well-respected and unique legal system specialized and experienced in business cases with the Court of Chancery
- Easy fundraising from venture capitalists
- Corporate privacy at a higher level compared to other states
Discover Top 4 Benefits Of A Delaware Corporation to understand more about why you should incorporate a Delaware corporation.
3. What are disadvantages when incorporating in Delaware as a corporation?
Besides great advantages, a Delaware corporation still has some disadvantages as follows:
- More difficult to create than other legal entity types
- More costly to operate as a startup than LLCs
- Complicated to settle franchise tax
Still, such cons can be minimized. You can seek professional service providers who can help you to set up a Delaware corporation efficiently.
4. What is the structure of a Delaware corporation?
Basic structure of a Delaware corporation includes:
- At least one shareholder who makes major decisions but doesn’t involve in operating activities of the company. The shareholder who owns more than 50% of all shares is the key influencer for the decisions;
- At least one director who manages the company on behalf of the shareholders, makes general decisions for the running of the company and takes part in all operating activities of the company including officer appointment;
- At least one officer who is responsible for day-to-day operating management.
5. How many types of corporations are there in Delaware?
There are four types of corporation in Delaware. You can choose to form a general corporation, a close corporation, a non-stock corporation or a public benefit corporation depending on your business needs.
General corporation is the most common type of corporation. An S corporation (S-corp) and a C corporation (C-corp) can be formed from a general corporation. C-corp is the default type of corporation, but you need to file form 2553 with the IRS to register an S-corp.
The main difference between C-corp and S-corp is taxation. With a S-corp, income passes through the corporation directly to shareholders. S-corp limits only 100 shareholders and 1 class of stock. By contrast, double taxation is the biggest downfall of C-corp, but its flexibility of stock is a big plus to attract venture capitalists. Learn more about Delaware S Corp vs C Corp and issues that differentiate them.
6. How do I register a Delaware corporation?
Below are basic procedures to open your corporation in Delaware:
- Choosing the name for your corporation as per Delaware law;
- Securing your corporate domain name if your company needs a business website for operation;
- Choosing the registered agent;
- Filing certificate of incorporation;
- Adopting corporate bylaws to manage and record day-by-day internal business activities of your corporation;
- Selecting the Board of Directors and holding the first corporate meeting;
- Determining stock information;
- Complying with state tax laws and other regulations.
Let’s take a look at detailed guidelines on How To Form A Delaware Corporation.
7. What are Delaware corporation annual fees? (minimum tax)
There are two Delaware corporation fees that you need to pay annually, which are:
- Annual report filing
- Franchise tax
The fees will depend on each type of corporation. For non-stock for profit and public benefit corporations, the franchise tax imposed on these corporations is $175. Exempt corporations don’t have to pay franchise tax but are required to file an annual report. The filing fees for annual reports will vary from $25 to $125 depending on the type of corporation.
For general corporations, they have to file an annual report and pay franchise tax annually to maintain its good standing status in Delaware. There are two ways to calculate franchise tax for Delaware corporations, which are Authorized Shares Method (minimum amount as $175) and Assumed Par Value Capital Method (the minimum amount as $400).
Franchise tax and annual reports are complex topics to understand within just a few sentences. Read our comprehensive analysis of Delaware Franchise Tax And Annual Reports.
8. How many shares should be authorized when forming a Delaware corporation?
Your company needs to own and authorize 1 share at the minimum. But the number of shares actually reaches up to a million or more depending on your business scale and purpose.
The purpose of share authorization is to issue them to shareholders for their contributions in return or to employees as the incentives.
It is important to keep in mind that the number of shares authorized and issued has a significant impact on the amount of franchise tax that your company has to pay annually.
9. Can I register Delaware corporation but transact business out of the state? Is there any drawback?
The answer is yes. As a matter of fact, there is a large number of Delaware corporations conducting its business outside the state.
In this case, Delaware requires you to apply for a foreign qualification. You could also need to follow some requirements in terms of tax filings for both Delaware and the place you conduct your business. Hence, cost may increase.
However, the state’s advantages regarding business laws, corporate privacy, taxation and capital investment certainly outweigh these inconveniences.
10. Which industry should be a good choice for Delaware incorporation?
As one of the most popular states in terms of incorporation, there are a variety of business sectors that you can choose to incorporate. There are five leading industries in Delaware as follows:
- Manufacturing and logistics, especially chemicals, the second-largest traded industry
- Biotech, Science & Technology
- Fintech, Business & Financial Services
- Agriculture & Food
- Education & Healthcare
Aforementioned business sectors are the largest employers in Delaware.
11. How do I dissolve my Delaware corporation?
When it is time to dissolve your Delaware corporation, take these three main steps to dissolve your corporation:
- Hold a meeting for all shareholders to get a final decision on whether or not dissolving the corporation
- Pay all franchise taxes and file annual reports to the State of Delaware
- File Certificate of Dissolution with the Secretary of Delaware
12. A Delaware Limited Liability Company or Corporation, which one is better?
Choosing Limited Liability Company (LLC) or corporation as your business entity type depends on your business scope and nature. It is important to understand the structure and key features of each type. Each one will have its own distinct and common benefits to the company owners.
LLC and corporation have different structures. An LLC doesn’t have three tiers (including shareholder, director, officer) as a Delaware corporation, but it does have the owners of the business or managers. Annual fees are also different between those types. LLC pays an annual flat fee for franchise tax of $300 and no need to file an annual report. A Delaware corporation’s annual fees are more complex as mentioned in question 7.
Profits and losses of these entity types are handled differently. For an LLC, profits and losses are passed through the business to individual owners, but a corporation is responsible for its profits and losses instead of shareholders.
See how BBCIncorp works for your business
When it comes to Delaware corporation formation, there may be more essential matters to take into account, but not just in these 12 FAQs. Remarkably, the formation process and taxation are usually the most concerned and also complex matters.
BBCIncorp is in close partnership with TaxHub and Wise to help you open and operate your business smoothly. Our formation packages are perfectly designed to match different needs of non-US residents wishing to form a Delaware corporation.
* Exclusive offers for Delaware companies incorporated with BBCIncorp: you can receive a 10% discount on tax filing service and 30 minutes of free CPA consultation from Taxhub specialists. We also offer free support to open Wise business accounts in multi currencies, plus our dedicated support team who is available to assist any of your arising problems.
Feel free to drop us an email via firstname.lastname@example.org should you want to find more about our service!