Guide to Starting a Corporation in Delaware, USA
Unless otherwise mentioned, the corporation mentioned in this article specifically refers to the C Corporation registered in accordance with Section 102 of the General Corporation Law of the State of Delaware.
Introduction
In Delaware, corporations and limited liability companies (LLCs) are the most prevalent business forms. Each has different characteristics that must be considered carefully because they may be an advantage to certain investors but not to others.
The most common option for an overseas company to establish a presence in the US is to incorporate a subsidiary in Delaware. The subsidiary can be a corporation or an LLC. A corporation offers limited liability and has centralised governance structures. Similarly, an LLC offers limited liability and can have centralised governance structures if the members so elect. While corporations have been and still are the first choice for foreign companies establishing a business presence in Delaware, LLCs are an acceptable alternative, but careful consideration should be given to the governance and tax aspects discussed below.
The main statutes governing Delaware corporations and LLCs are the Delaware General Corporation Law (Title 8, Chapter 1, Delaware Code) and the Delaware Limited Liability Company Act (Title 6, Chapter 18, Delaware Code). Both statutes are available online.
The Delaware Division of Corporations is the administrative agency responsible for accepting and processing all documents required to be filed to form and register any business entity in Delaware.
1.
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Major Features of Delaware Corporation
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(1)
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Name of Company
The name of a corporation must include one of these words: "association," "company," "corporation," "club," "foundation," "fund," "incorporated," "institute," "society," "union," "syndicate" or "limited," or the abbreviation of one of these words.
Also, the name of a corporation must be distinguishable from the names that are reserved with the office of the Division of Corporations or from the names on records of each other corporation, limited liability company, partnership, limited partnership or statutory trust, except with the written consent who has reserved such name.
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(2)
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Capital
Delaware does not have a minimum capital requirement to incorporate a corporation. However, the annual Delaware Franchise Tax amount will be determined based on the number of shares; therefore, whenever authorizing shares for a Delaware corporation, it is best to keep the number of shares low. A good rule of thumb is to authorize only what the corporation will need. Corporations with 5,000 or less authorized shares are considered minimum stock and will pay the minimum Delaware Franchise Tax each year. Otherwise, the franchise tax amounts will be calculated with two different methods, and the method that results in the lesser tax will be applied for the further calculation. The detailed calculation method will be explained later.
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(3)
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Shareholders
There are no restrictions on the number of shareholders (equity holders) a Delaware company can have. A corporation can have one or more stockholders.
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(4)
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Incorporators
An incorporator’s primary role is to file the certificate of incorporation. The incorporators?names and addresses must be listed on the certificate. An incorporator may be a person, corporation, partnership or association. The incorporator does not have to reside or be incorporated in Delaware.
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(5)
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Director
There are no general restrictions or requirements on the appointment of directors, except that they must be natural persons. Typically, the corporation’s initial directors consist of one or more of its founders, but there is no statutory requirement that a director must be a stockholder. There is no requirement that the directors must reside in Delaware or in the US. There is also no requirement that any number of directors must be US citizens or permanent residents. All directors can be foreign citizens.
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(6)
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Registered Agent
All corporations registered at Delaware must have a registered agent on behalf of the corporations to receive legal documents. A registered agent may be an individual who resides in Delaware or a business entity that is authorized to do business in Delaware. The registered agent must have a physical street address in Delaware.
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(7)
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Certificate of Incorporation
A Certificate of Incorporation is a form filed with an agency in your state to register your corporation. In most states, this same form is called “Articles of Incorporation,?but a handful of states, including Delaware, use the term “Certificate of Incorporation?instead. We offer a free Certificate of Incorporation template that you can use in Delaware or any state.
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(8)
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Bylaws
A corporation’s bylaws are its internal rules and operating procedures. They are not filed with the Secretary of State. Bylaws may include any provisions relating to the business and affairs of the corporation or the rights and powers of the corporation and its directors, officers, shareholders and employees. Bylaws cannot include anything that is inconsistent with the law or the certificate of incorporation. The incorporators or directors must approve initial bylaws.
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2.
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Corporation VS LLC
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In Delaware, corporations and limited liability companies (LLCs) are the most prevalent business forms. Each has different characteristics that must be considered carefully because they may be an advantage to certain investors but not to others.
There are certain common features of corporations and LLCs. These are:
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(1)
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Limited Liability
Both corporations and LLCs shield their owners from personal liability. The stockholders of a corporation and the members of an LLC are not personally liable for the debts, obligations and liabilities of the entity.
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(2)
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Perpetual Existence
Delaware corporations and LLCs have a statutory right to exist perpetually and continue in existence even if the original principals depart.
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However, there are significant differences between the two business forms with respect to taxation and management:
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(1)
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Taxation
A corporation's income may subject to double taxation. A corporation must pay taxes on its income when earned, and the stockholders must pay taxes on any dividends or other distributions they received from the corporation. However, the corporation can choose to retain the earnings to finance growth and reasonable needs of the business till USD 250,000 (USD 150,000 for personal service corporation) to avoid double taxation. Accumulated Earnings Tax with tax rate 20%, in addition to regular income tax, will be applied on corporations for unreasonably accumulating earnings, which is the amount exceed USD 250,000 (USD 150,000 for personal service corporation).
In contrast, LLCs have the advantage of flow-through taxation. An LLC does not pay entity-level taxes on its income; instead, profits and losses pass through to the members, then the members will report the apportioned profits on their own income tax returns with applicable tax rates, regardless whether the income is distributed or not. If the LLC is profitable but does not distribute any cash to the owners, the owners are still taxed on the income of the LLC. That is one potential downside of the LLC. However, pass-through taxation can be advantageous if the owners can anticipate and take advantage of company losses on their own tax returns.
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(2)
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Management
Corporations have mandatory centralised management. Control of the business and affairs of the corporation is vested in the corporation’s board of directors, and the stockholders are generally not involved in the day-to-day management of the affairs of the corporation. However, stockholder approval is required for certain significant transactions such as mergers. On the other hand, LLCs can be managed either by the members themselves or by managers appointed by the members.
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Corporation Registration Procedures
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To form a corporation in Delaware, you need to take the steps set forth below.
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(1)
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Choose a Corporate Name
Your corporation’s name must not be deceptively similar to the names of other business entities already on file with the Delaware Secretary of State. Names may be checked for availability by searching the Delaware Secretary of State business name database. You can reserve a name online through the Delaware Division of Corporations website.
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(2)
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Prepare and File Certificate of Incorporation
Your corporation is legally created by filing a Certificate of Incorporation with the Delaware Secretary of State. Articles can be filed by postal mail or online and you must include a Filing Cover Memo.
The articles must include the corporation's name; the Registered Office street address and name of the agent for service of process at that address; the number of shares authorized to issue and the par value; its purpose; and the name and mailing address of the incorporator.
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Appoint a Registered Agent
Every Delaware corporation must have an agent for service of process in the state. This is an individual or corporation that agrees to accept legal papers on the corporation's behalf if it is sued. The agent should agree to accept service of process on your corporation’s behalf prior to designation.
The agent may be an individual Delaware resident, or a business entity authorized to do business in Delaware. The registered agent must have a physical street address in Delaware.
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(4)
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Set Up a Corporate Records Book
Set up a corporate records book in which you keep all your corporation's important papers, including minutes of director and shareholder meetings, stock certificates, and stock certificate stubs. Keep your corporate records book at the principal office of your corporation.
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(5)
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Prepare Corporate Bylaws
Bylaws are an internal corporate document that set out the basic ground rules for operating your corporation. They are not filed with the state. Your corporation is not legally required to have corporate bylaws, but you should adopt them because they establish your corporation’s operating rules, and help show banks, creditors, the IRS, and others that your corporation is legitimate.
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(6)
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Appoint Initial Corporate Directors
The incorporator, the person who signed the articles, must appoint the initial corporate directors who will serve on the board until the first annual meeting of shareholders (when the board members who will serve for the next term are elected by the shareholders). The incorporator must fill in an "Incorporator's Statement" showing the names and addresses of the initial directors. The incorporator must sign the statement and place a copy in the corporate records book. The statement need not be filed with the state.
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(7)
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Hold Your First Board of Directors Meeting
The first meeting of the corporation's board of directors should be held at which the directors can appoint corporate officers, adopt bylaws, select a corporate bank, authorize the issuance of shares of stock, set the corporation's fiscal year, and adopt an official stock certificate form and corporate seal. The directors?actions must be recorded in corporate minutes prepared by the incorporator or any of the directors and approved by the board of directors. Additionally, if the corporation will be an S corporation, the directors should approve the election of S corporation status.
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(8)
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Issue Stock
Issue stock to each shareholder. Although not legally required in most states, small corporations usually issue paper stock certificates. Enter each shareholder's name and contact information in the corporation’s stock transfer ledger.
A share of stock in your corporation is classified as a security under state and federal security laws that regulate the offer and sale of corporate stock. However, the federal government and all states exempt most small corporations from these laws. For example, federal law exempts "private offerings" a non-advertised sale to a limited number of people (generally 35 or fewer). Most states have enacted their own versions of this SEC exemption.
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4.
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Compliance Requirements
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(1)
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Comply with Delaware Annual Report and Franchise Tax Requirements
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All corporations incorporated in Delaware must file an annual report and pay franchise tax. The taxes and annual reports of corporations must be received by the Delaware Division of Corporations no later than the following March 1st after the end of calendar year. Foreign corporations are required to file an annual report by no later than the following June 1st after the end of calendar year.
The annual report filing fee for domestic corporations is USD50 plus franchise taxes due upon filing of the report. The filing fee for foreign corporations is USD125.
The minimum franchise tax is USD175 for corporations using the authorized shares method and a minimum tax of USD400 for corporations using the assumed par value capital method. The maximum franchise tax is USD200,000 for both methods, unless it has been identified as a large corporate filer then the tax will be USD250,000. Corporations owing franchise taxes USD5,000 or more pay estimated taxes in quarterly instalments with 40% due June 1, 20% due by September 1, 20% due by December 1, and the remainder due March 1. Consult with Kaizen consultants for more details on the Delaware Franchise Tax Calculation.
The corporation's penalty for not filing a completed annual report on or before March 1st is USD200. Interest at 1.5% per month is applied to any unpaid tax balance. Foreign corporations are assessed a penalty of USD125 if the annual report is not filed on time.
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(2)
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Comply with Other Tax and Regulatory Requirements
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Additional tax and regulatory requirements apply to your corporation. These include:
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(a)
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EIN
Your corporation must obtain a federal employer identification number (EIN). EIN can be obtained by completing an online application on the IRS website if the responsible person has SSN. Otherwise, EIN application can only be filed via postal mail.
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(b)
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S Corporation Filing
If the corporation wants to elect S corporation status for tax purposes, it must submit Form 2553 Election by a Small Business Corporation (signed by all the shareholders). The election should be filed within two months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect. See the IRS S Corporation Fact Sheet for details.
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(c)
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Business Licenses
Depending on its type of business and where it is located, your corporation may need to obtain other state and local business licenses.
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Taxation
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In Delaware, taxable business entities are only subject to Delaware income tax on Delaware source income, that is, the portion of their income allocated or apportioned to Delaware. There is no state corporate income tax on goods or services provided by Delaware corporations operating outside of Delaware. In addition, purchases in Delaware are not subject to sales tax, and Delaware has no value-added tax (VAT).
Therefore, a Delaware corporation is subject to the following taxes:
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(1)
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Corporate Income Tax
Every domestic or foreign corporation doing business in Delaware that is not specifically exempt must file a Delaware corporate income tax return and must pay a Delaware corporate income tax of 8.7% on the corporation’s federal taxable income from Delaware sources, or income apportioned to Delaware. Delaware law does not require the payment of a minimum corporate income tax.
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Gross Receipts Tax
A corporation doing business in Delaware with receipts from Delaware sources is subject to Delaware gross receipts tax at various rates (currently ranging between .0945% and 0.7468%) depending on the nature of the business conducted in Delaware.
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Federal Income Tax
According to Internal Revenue Service (IRS), all business entities must file an income tax return on or before the following April 15th of the tax year, or Oct 15th with extension, if calendar year is applied on tax purpose. However, the business entity must pay the tax due in full no later than the original due date for filing its tax return (not including extensions). Interest and penalty will be charged on taxes paid late even if an extension of time to file is granted.
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Foreign Corporations Doing Business in Delaware
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All corporations organized outside of Delaware must register with the Delaware Secretary of State to do business in Delaware. Foreign corporations must appoint a registered agent for service of process physically located in Delaware. To register, file the State of Delaware Qualification Certificate of a Foreign Corporation. The completed certificate must be accompanied by a Certificate of Existence, dated within 6 months prior to the filing of the certificate, from the foreign corporation’s home state.
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