For most foreign startups and entrepreneurs eyeing the US market, Delaware is one of the first destinations that comes to their mind for numerous perks and benefits. Delaware corporations are becoming popular for businesses. They offer the greatest liability protection for owners and shareholders but they may be the most difficult entity to create.
By the end of this article, you’ll have a clear understanding of how to form a corporation in Delaware.
1. Forming a corporation as a preferable option in Delaware
State of Delaware, Annual Report Statistics, Business Entity Formations 2019
As shown from the figure, corporations are the entity accounting for the second largest proportion of all business entities in Delaware, after LLCs.
Corporation is the common business form in Delaware because of following factors:
- Business-friendly policies in terms of tax
- Efficient corporate legal process with a large body of Delaware case law
- Its attraction to venture capital funding
- Top business privacy protection in the US
Learn more about the top 4 benefits of Delaware corporations in our previous blog to understand reasons behind the popularity of corporate formation in the state.
2. Different types of Delaware corporation
Delaware corporations are classified into four main groups which are General Corporation, Close Corporation, Public Benefit Corporation, and Non-Profit Corporation.
General corporations are the most common type in Delaware including C corporation (C-Corp) and S corporation (S-Corp). S-Corp is a special tax status of corporations initially formed as a general corporation, a close corporation, or a public benefit corporation.
All corporations in Delaware are entitled as a C-Corp by default unless the corporations file form 2553 with the IRS for S corporation or form 1023 for non-taxable status. An S-Corp is beneficial to the business by passing all profits and losses to the owners for federal income tax purposes.
The greatest advantage of a Delaware C-Corp is that it allows corporations to have two or more classes of stock, while an S-Corp is limited to 1 class of stock and only 100 shareholders. An S-Corp shareholder must be a natural person, not a venture capital company.
Corporate structure of Delaware corporations:
A Delaware corporation has a distinct legal business structure compared to other business entities. The ownership of the company is distributed between shareholders whose liabilities depend on the number of shares they own. A Delaware company is managed by the Board of Directors which is appointed in shareholder meeting. The company is subject to corporate income tax, but its profit is distributed to shareholders and taxed at personal income tax rate.
Let's learn more about Delaware S Corp vs C Corp and issues that differentiate them in our previous analysis.
3. How to form a Delaware corporation
Opening a Delaware corporation is a complicated process requiring business founders to follow some specific rules by the State. There are various types of corporations in Delaware, so it’s important to determine which type meets your business needs in the first place.
Although you can choose to complete the registration process on your own, it could be troublesome and time-consuming. Choosing a 3rd-party agent for Delaware company formation to get everything done for you is a wise choice to relieve you from arising problems. Below is brief summary of the process to set up a Delaware corporation
3.1 Selecting your corporate name
Naming your corporation is the initial step complying with The Delaware General Corporation Law. Below are several criteria for a Delaware corporation name:
- Including one of the following words as “association,” “company,” “corporation,” “club,” “foundation,” “fund,” “incorporated,” “institute,” “society,” “union,” “syndicate’’, “limited,” or theirs foreign translations written in roman characters or letters; or abbreviations thereof, with or without punctuation.
- Dissociating your corporate name from “trust” and “bank’’ (or any of its variations) if your company doesn’t offer banking services.
- Avoiding naming the corporation that leads to the misleading of the company services.
- Avoiding copyright infringement by checking the availability online via The State’s search tool.
- Ensuring the copyright of your corporate name by reserving it online via State of Delaware or by mail post. The reservation will validate within 120 days from the reserved date with only $75 and can be renewed after 120 days.
3.2 Securing domain name (URL) for your corporate website
This step is an optional but advisable step for business founders who want to create a professional website for their own company. A professional domain name gives your business instant credibility and helps your customers easily access your business.
It is important to check your desired domain name availability. You can create your own web address or buy it for copyright protection from other businesses.
3.3 Choosing your Registered Agent
According to Delaware Code tit. 8, c. 3 § 13, every corporation in the state requires a registered agent to receive notices and legal papers on behalf of the corporation during or after the process of formation. An individual Delaware resident or a business entity authorized to do business in Delaware is qualified as a registered agent if it is physically located in the state.
A company headquartered in Delaware can act as its own registered agent instead of choosing a third-party agent. However, in this case, the company gives up its right to maintain corporate privacy, one big benefit offered by Delaware to all corporations in the state.
3.4 Filing certificate of incorporation
Certificate of incorporation, or certificate of formation, is considered as the company’s birth certificate, a proof of company formation and registration. The document can be filed online or by post via the Secretary of Delaware including some required information as follows:
- The company’s name and its entity type
- The registered agent’s name and address
- The number of authorized shares and the number of shares issued
- The corporate purpose
- The company’s street and mailing address
- Incorporator’s name, street, and mailing address
The incorporator is the one who is responsible for filing and signing paperwork and incorporation certificates.
The cover memo must be filed together with the certificate of incorporation. It is created automatically after online completion of filing, or it can be downloaded from the State of Delaware website, Division of Corporations.
It is not required for the company to disclose Par Value, the initial selling price of shares, in Delaware.
The minimum filing fee is $89, plus $9 for each additional page, for up to 1500 stocks of no par value or up to $75000 for par value stock. The price will increase depending on the number of shares of no par value stock and the value of par value stock.
3.5 Adopting corporate bylaws
Bylaws are a set of corporate rules supporting most of the internal activities of a corporation to ensure its smooth daily operation. The adoption of bylaws is advised for all Delaware corporations and should be created by competent lawyers.
Bylaws include detailed corporate information such as:
- the company’s name and address
- corporate meetings and agreements
- Board of Director, Officer
- stockholder-related information
- voting procedures and rules governing business actions, etc.
There is no need to file corporate bylaws with the state of Delaware.
3.6 Selecting Board of Directors and holding the first corporate meeting
It is important to note that there is at least one director’s name provided to fill in the Incorporator's statement for the incorporation. The incorporator needs to appoint the initial directors who will serve on the board until the first annual shareholder meeting.
The first corporate meeting needs to be held for the Board of Directors to appoint officers, set fiscal year, open corporate bank account, adopt bylaws, corporate seal, and stock certificate. All actions in the meeting must be recorded in meeting minutes – a book containing all corporate information and actions.
3.7 Determining stock information
This step requires the corporation to decide the following figures:
- The amount of stock
- Par value for each stock
- The number of shares planned to be authorized and how many of them planned to be issued
The purpose of issuing stock to shareholders is to receive their contributions in return such as cash, capital, services, etc.
3.8 Complying with state tax laws and other regulations
Applying for an Employer Identification Number (EIN). This number acts as the company’s social security number. An EIN needs to be obtained initially due to its necessity for other procedures such as opening bank accounts, hiring and paying employees, paying taxes, etc. EIN can be applied online for free via the IRS website.
Filing annual reports and paying franchise tax. All corporations in Delaware must file annual reports and pay franchise taxes except for some exemptions. The annual fee is different depending on different types of business entity. For corporations, it is calculated by two methods which are the Authorized Shares Method and the Assumed Par Value Capital Method.
Obtaining business licenses. It is required for almost every company to apply and have a business license in Delaware. After the company formation, this step is required to be done online via Delaware One Stop or by mail post to the Delaware Division of Corporations. License fee is $75 or more depending on its duration, from one to three years, and its business activity.
Forming a Delaware corporation is a complicated process regarding filing corporate papers and complying with Delaware regulations. This thorough guidance on how to form a Delaware corporation covers all the bases of the formation process. A startup, however, could take plenty of time and face many problems.
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