America is long known as a dream destination for investors and business owners worldwide. But deciding which state to incorporate your company is a tough decision. However, starting a business in Delaware can bring you tons of benefits in terms of taxation, pro-business environment, or minimal compliant requirements.
1. Overview about Delaware
Despite the fluctuation of the economy, Delaware remains one of the famous choices in terms of incorporation. Even giant corporations such as Bank of America and Google decided to opt for Delaware as the incorporation destination.
Then, what are the reasons behind all of these crucial decisions? The answer lies in the state’s law, taxation, and favorable business environment.
General Corporation Law. This set of laws is top listed as the most flexible and advanced business laws in the US.
Flexible business structure. It is undeniable that a business structure can have a great impact on its tax liability. Delaware offers a wide range of business entities as well as unique structures to attract investments. And, it works!
Minimal taxation. No exaggeration to say that the tax system of Delaware creates a business-friendly environment for both domestic and foreign business owners.
Privacy. The names of directors or officers of a corporation or that of the members/managers of an LLC don’t need to be listed in the formation documents. Due to this reason, Delaware is the home of many anonymous companies worldwide.
Delaware’s Court of Chancery. In Delaware, there are judges whose expertise is corporate law. They only deal with cases related to business-related matters.
2. Common types of business entities in Delaware
As mentioned above, though being a small state in the US, Delaware offers quite a few business structures that are suitable for a vast majority of business scopes.
Let us guide you through the most common types of company structures in Delaware:
Sole proprietorship. As in any other region, sole proprietorship is the simplest business entity to incorporate, and Delaware is no exception. Its benefits consist of a fast and simple formation process as well as easy dissolution. One thing to keep in mind is that the owner will hold full liabilities for all company-related issues.
Partnership. Delaware partnership is divided into 3 categories: General Partnership, Limited Liability Partnership, and Limited Partnership. Each has its own strengths and weaknesses.
Corporation. Delaware corporation is a separate legal entity. It means that corporations in Delaware hold their own liabilities.
Limited Liability Company (LLC). This is the most opt-for type of business entity in Delaware as it can be considered as the most flexible structure. Carrying the same advantages as corporation – separate liability, LLC in Delaware also offers a wide range of ways to custom its business.
3. Starting a business in Delaware: a thorough guide
Though associated with a simple and straightforward process, starting a business in Delaware is no easy task.
Below is the most typical incorporation process in Delaware. However, please be noted that, with a different type of business, location, and employee quantity, comes a slightly different process. The best way is to consult an expert.
Step 1: Choose a suitable business structure
As the Delaware Division of Corporations does not offer legal advice in terms of company formation, it is recommended that you contact experts or agents with expertise in Delaware law for advice.
Still, when choosing a business structure, you should consider the following criteria:
- The setup cost
- The risk when doing business as that structure
- The compliance and operation of that structure
Step 2: Work with a registered agent
It is obligated by law to a business entity to have and work with a Registered Agent in the State of Delaware.
However, this won’t apply to you if your business is physically located in Delaware. In this case, your business can act as your own registered agent.
Step 3: Reserve company’s name
Though being an optional step in the incorporation process, reservation of your company is a crucial step you shouldn’t ignore.
Your reserved name can be held for a 120-day period. There are 2 ways to reserve your Delaware company name:
- Online: You can reserve your desired company name here for $75. After finishing your reservation, print out the confirmation page to store. Noted that all transactions via this site are non-refundable.
- By writings: Another method to reserve a company name is to write an application and upload, fax, or mail it to the Delaware Division of Corporations’ office.
Step 4: Fill and submit the incorporation form
The next important step is to file the corresponding incorporation form of your business. You can find the sample forms with thorough instructions as well as the fee here.
There are also 2 methods to submit your incorporation form:
- Using Document Upload Service: After finishing filing the form, you can upload and submit it to the mentioned upload service.
- Submitting by mail: With this method, you will need to send the form along with a cover sheet with your name or company name (which can be found here) to the Division of Corporations: John G. Townsend Building – 401 Federal Street – Suite 4 – Dover, DE 19901. Noted that you must also provide the return address and phone number when choosing this method. Plus, all fees must be paid upon submission. The forms will be returned to you via First Class mail (or via Federal Express or UPS if an account number is provided upon request).
If you need any assistance regarding this step, don’t hesitate to contact us for consultancy!
Step 5: Obtain a Certificate of Status
Certificate of Status (also known as Certificate of Good Standing) is a document demonstrating that a corporation or an LLC is permitted to conduct business in Delaware. Of course, to obtain this certificate, all state requirements must be met.
A Certificate of Status can be ordered at the time of filing your company. A Short Form Certificate of Status will cost $50 each, whereas that of the long-form costs you $175 each.
Note: Only some Financial Institutions will require this type of certificate in your company filing. It’s best to check with your Financial Institution for the most accurate guidance.
Step 6: Comply with annual reporting requirements
All corporations incorporated in Delaware are obligated to file an Annual Report and pay a franchise tax. However, all exempted domestic corporations are exempted from tax, but still subject to file an annual report.
- With Exempted Domestic Corporation: Filing an Annual Report or Amended Annual Report will cost you $25.
- With Non-exempted Domestic Corporation: The fee of filing an Annual Report or Amended Annual Report will be $50.
In terms of franchise tax, you will have to pay a minimum of $175 or a maximum of $200,000. Taxpayers who owe more than $5,000 or more is obligated to pay estimated taxes in quarterly installments as follows:
- 40% due June 1st
- 20% due September 1st
- 20% due December 1st
- Remainder due March 1st
Taxes and Annual Reports must be submitted before March 1st each year. Any delay in not filing a completed annual report on or before March 1st shall result in a penalty of $200. An interest at 1.5%/month is applied on any unpaid tax balance.
In December each year, notification of Annual Report and Franchise Taxes due will be sent to you by your Delaware Registered Agent. One good news is you can file your Annual Report online as Delaware has mandated electronic filing for domestic corporations.
Note: Limited Partnership, Limited Liability Companies, and General Partnership do not have to file an Annual Report, but they are subject to an annual tax of $300. This tax needs to be paid before or on June 1st each year.
Delaware LLC and Corporation are two most common types of business entities for foreigners. If you wish to get insights into how to set up these types, don't miss out our below blog articles:
4. Other considerations when starting a business in Delaware
Though your incorporation process is complete, there are some more issues that need to be taken into account.
Business bank account. A business bank account is crucial to any company. Generally, opening a business bank account for non-resident will require the following documents: An authorized certificate of incorporation (or the operating agreement), Federal Tax ID number, Physical address in the US, a valid ID of the owners or members.
There will be slight differences among banks, it is advisable to contact your preferred bank for detailed information.
Gross Receipts Taxes. Your business will be subject to this type of tax if you engage in business inside of Delaware. For more information about this tax, please visit this page.
Withholding Taxes. If you have an office or conduct business in Delaware and make a payment of wages or payment for services, your company is subject to Withholding Tax.
Personal income tax for non-resident. Delaware, like many other states, utilizes a personal income tax on both resident and non-resident.
Certificate of Authority (Foreign qualification). This will be your issue if you incorporate your business in Delaware and want to engage business in other states. In other words, you will need a Certificate of Authority to do business in other states besides your incorporated state.
Starting a business in Delaware might be no easy task. There are quite a few requirements that need to be thoroughly taken into consideration. A consultancy from experts is advisable to save your time and resources. Contact us NOW!