Delaware Corporation: Everything You Need to Know
A Delaware corporation is simply a company that is incorporated in the state of Delaware.19 min read
What Is a Delaware Corporation?
A Delaware corporation is simply a company that is incorporated in the state of Delaware. Many companies choose to be incorporated in Delaware because there are a number of financial benefits to being incorporated there in comparison to other U.S. states.
Companies incorporated in Delaware are protected by the business laws of that state, which are known to protect and benefit corporations.
Prior to the early 1900s, if an individual wanted to form a corporation it had to be approved by the U.S. Congress. Delaware changed that. Delaware was one of the first states in the U.S. to allow an individual to follow a simple process to incorporate his or her business. And to this day, Delaware remains one of the incorporation capitals of the the U.S.
Why Is a Delaware Corporation Beneficial?
Delaware consistently ranks as one of the best places to incorporate a business. More than half of the Fortune 500 companies in America are incorporated in Delaware. Some of the many advantages for companies to incorporate in Delaware include:
Laws protecting Delaware corporations
The Court of Chancery
The Court of Chancery and Laws to Protect Delaware Corporations
The business laws in Delaware are reliable, and almost every type of lawsuit for or against a corporation has already been argued and ruled upon by a judge. This means that there's precedent for almost any legal problem a corporation might have.
Business cases actually have their own court system in Delaware, known as the Court of Chancery. The business cases that come through the Court of Chancery aren't heard by juries, but by judges.
The Court of Chancery is so well-known that the business law set forth there is studied in every law school in America. That means that probably every law student has studied Delaware cases when learning about business law and legal regulations.
Another benefit of the Court of Chancery is that the judges are all well-versed in business law. Because the court's sole purpose is to hear business-related legal cases, the judges there are some of the most competent in business dealings. Having a judge rule on a business case can often be in the favor of large corporations. Juries are sometimes swayed to the side with the people, not the corporation.
Delaware earns one-third of its state budget from incorporating businesses. This means that it has an interest in keeping its fees low and its laws up to date.
Having a large corporation incorporated in Delaware can be a big advantage if it often has to fight legal battles.
The extensive history of business cases that are heard in the Delaware Court of Chancery means that there is extensive precedent. Most cases have a high outcome predictability because a similar case has been heard and decided upon before.
Being able to predict the outcome of a case can be highly beneficial to businesses. It can help a business decide if the case is worth taking to court or settling outside of court.
To take advantage of this tax break a corporation can create a holding company which is incorporated in Delaware. The holding company "holds" all of the intangible assets, leasing them back to the corporation. This arrangement creates an expense which is paid to your own company and isn't taxed. This can create massive savings for large corporations.
Corporate filing can be complicated in many states, but not in Delaware. The Delaware Division of Corporations wants to make sure the process is as simple as possible because the filing fees bring in a large amount of money for the state. It's in their best interest to keep the filing process simple.
The Delaware corporate filing also requires minimal personal information. This helps shareholders and directors of corporations keep their personal information private.
Corporations must file annual reports. In Delaware, the annual report can be filed online, requires minimal information, and is simple to file.
This fast and easy maintenance process helps busy corporations to maintain their standing with minimal effort.
Incorporation in the state of Delaware has earned a reputation, similar to that of a brand name suit. A Delaware corporation looks professional. It represents your brand and corporation well to investors, bankers, and other professionals who work with your business.
Delaware corporations and their operations are familiar processes to many business people. This means that they already know to a great extent what it will be like to work with your business. This gives investors and shareholders peace of mind and security.
Incorporating in Delaware is a fast process
There are many options for speed filing to incorporate in Delaware. There's no extra cost for a standard filing, but there are fees for the speed filings.
There are options to incorporate in Delaware in 24 hours, the same day, in two hours, or in a half-hour, and all can be done online. The same-day, two-hour, and half-hour options are very expensive, and should be reserved for dire need.
The Delaware corporate statutes give a business a lot of flexibility in how the business is organized and in the rights and duties of the board members and shareholders.
Delaware allows one person to be the director, shareholder, and officer of a Delaware corporation. Other states typically require three different people to fill these positions.
Other states have begun to mimic Delaware corporate statutes, but the extensive Delaware case law still outweighs these benefits in other states.
Preference for Investors
Angel investors and venture capitalists prefer to invest in corporations that are incorporated in Delaware. If you know that you'll need funding from either of these sources, it's important to look into incorporating in Delaware.
Many investment bankers also prefer to work with Delaware corporations. Before taking a company public or for an Initial Public Offering (IPO) many investment bankers will insist that it's incorporated in Delaware. Converting a company to a Delaware corporation can be expensive.
High-Quality Customer Service
The Delaware Secretary of State's Office makes strives to give good service to Delaware corporations. Expedited filings are given priority. In other states, even expedited filings aren't guaranteed to be completed on time and are much more expensive than in Delaware. An expedited filing can be crucial if you're trying to close a deal.
Does It Benefit a Small Business to Incorporate in Delaware?
The short answer is yes. One of the biggest reasons that a business should incorporate in Delaware is asset protection. Small businesses are given the same limited liability protection in Delaware that large businesses are.
A Delaware corporation also helps to separate personal and business assets. This means that if your company is sued, you're less likely to lose your personal assets in the process. This limiting of liability is especially important to small businesses or single member limited liability companies.
Becoming a Delaware corporation can benefit small businesses in other ways as well.
No business license is required.
Most holding companies that are incorporated in Delaware don't need to pay a gross receipts tax or obtain occupational business licenses.
The Delaware Articles of Incorporation require minimal personal information. This makes filings simple and protects corporate members from identity theft.
Delaware corporations have slightly smaller fees than Delaware LLCs
This cost difference may seem small in the short term, but over time, there are a lot more ways for Delaware corporations to lower fees than for Delaware LLCs have.
A corporation that maintains an office in Delaware but doesn't operate in Delaware is exempt from paying the state corporate tax. Any Delaware corporation that elects to be taxed as an S-corporation with the IRS also doesn't pay Delaware corporate income tax.
Incorporating Your Startup as a Delaware Corporation
For a startup looking to attract investment, incorporating in Delaware can be a huge benefit.
Angel investors and venture capitalists often prefer to work with Delaware corporations because they know how the process works and trust the system that's in place for corporations.
Starting off as a Delaware corporation can give your business a leg up when seeking funding. This can also save a lot of legal and accounting headaches in case investors insist on moving your business to be incorporated in Delaware before investing.
Can I Have a Delaware Corporation if I Don't Live in Delaware?
Yes. There's only one physical requirement for registering a business as a Delaware corporation. That is that the business must have a registered agent in Delaware. It's easy to find and hire a registered agent in Delaware to meet this requirement.
A person can live outside the state of Delaware or even outside the U.S. and incorporate a business in Delaware. In fact, some of the benefits that are afforded to Delaware corporations are only given to non-residents.
No inheritance tax. Corporations that are owned by a non-resident and do no business in Delaware are not subject to inheritance tax. Residents, on the other hand, could pay up to 16 percent inheritance tax.
No sales tax. Delaware corporations can make purchases without paying sales tax on those purchases as Delaware has no sales tax.
No state income tax. As long as your Delaware corporation does no business in Delaware, your business won't pay state corporate income taxes. Residents of other states or countries may have to pay their own state's or country's income tax.
No ad valorem tax. This is an intangible personal property tax that doesn't exist in Delaware. As long as your state of residence also doesn't have an intangible personal property tax, you won't have to pay this tax.
LLC versus Delaware Corporation
The main difference between an LLC and corporation in Delaware isn't stocks and ownership percentage, but formality. In general, corporations in Delaware are much more formal than LLCs.
LLCs in Delaware are very flexible. In comparison, Delaware corporations require resolutions, shareholder meetings, recording and filing of forms to prove meetings, and voting majorities to make decisions.
Delaware corporations are automatically taxed as C-corporations but can file paperwork with the IRS to be taxed as S-corporations. LLCs can choose to be taxed as either type.
A Delaware corporation also carries some prestige. Being incorporated in Delaware can be a major benefit when trying to raise capital for your business.
How to Become a Delaware Corporation
Becoming a Delaware corporation is simple and fast.
File a Certificate of Incorporation.
This form should be filed with the Delaware Division of Corporations. A blank form can be found on their website.
Supply the required information.
Name of the Delaware corporation
Registered agent in Delaware and agent's office address
Amount of authorized stock and value per share
Name and address of person incorporating the business
Date of formation
Name and signature of the person incorporating the business
Pay the filing fee.
The fee is $89.
The typical filing time is three weeks.
For expedited filing, you can pay a $50 fee.
Mail or fax the completed Certificate of Incorporation to the Delaware Division of Corporations
If you don't personally want to deal with the filing of the incorporation form, you can easily hire one of the lawyers on UpCounsel to help you incorporate your business in Delaware.
Costs and Fees of a Delaware Corporation
There are several fees and costs that are associated with becoming a Delaware corporation. In general, the fees charged by Delaware are lower than what is charged by other states throughout the U.S.
Corporation filing fee: $89
This fee may go up depending upon how much stock is authorized and the value of the stock per share
If you authorize more than 1500 shares of stock with no par value, you filing fee will go up.
For 1500 to 20,000 shares: the fee goes up $0.01 per share
20,000 to 2 million shares: the fee goes up $0.005 per share
More than 2 million shares: the fee goes up $0.004 per share
If you assign a par value to shares, there is a different process.
Up to $2 million: Filing fee is calculated at $0.20 per $1000 of stock
$2 million to $20 million: Filing fee is calculated at $0.10 per $1000 of stock
More than $20 million: Filing fee is calculated at $0.04 per $1000 of stock
There are free calculators on the Division of Corporation's website
Cost of annual report: $50 for domestic, $125 for foreign corporations
Franchise tax: The minimum payment is $175.
There are two ways to calculate this tax. Which one is most beneficial will depend upon your business. You can choose which tax to pay, and it's recommended that you pay the method that results in a lesser tax.
The two methods are:
Par Value Capital
Minimum payment of $350
Bylaws for a Delaware Corporation
There is no statute in Delaware that requires a corporation to have bylaws.
Though not required, in general, bylaws benefit Delaware corporations. Bylaws govern the internal functioning of your Delaware corporation. The bylaws might be required for other purposes, such as opening a bank account.
Can I Incorporate My Own Business as a Delaware Corporation?
Yes. The filing process to create a Delaware corporation is simple.
That being said, if you're concerned about the process of filing as a Delaware corporation or don't have the time to do it, there are plenty of registered agents who can help you out. Consider hiring one of the lawyers on UpCounsel to help you file your paperwork and become a Delaware corporation.
Incorporating in Delaware versus Nevada
When deciding where to incorporate your business, you'll likely come upon information about Delaware and Nevada. Both of these choices are highly regarded and offer advantages for businesses that incorporate there. This is a brief summary of the advantages offered to a business that incorporates in Nevada.
Advantages of a Nevada Corporation
Delaware has ruled the incorporation landscape for many years, but Nevada is coming forward as one of the states offering advantages to benefit and attract businesses to incorporate there.
No state or corporate income tax
No fees on corporate shares
No personal income tax for corporations or LLCs
No franchise tax for corporations or LLCs
Shareholders, directors, or officers of a corporation don't need to be Nevada residents
Members and managers of an LLC don't have to be Nevada residents
Corporations are considered foreign in any state other than the state in which they are incorporated. It's important to consider this factor when deciding where to incorporate your business.
If you register your business as a Delaware or Nevada corporation, there may be fees associated with registering your business with your home state as a foreign business.
An Upcounsel attorney can help you to decide which state is the most beneficial for incorporating your individual business.
Statistics of Delaware Corporations
There are many benefits to having a Delaware corporation, and there are statistics to prove it.
Delaware has been rated the best legal climate for the past 10 years by the U.S. Chamber Institute for Legal Reform.
Over 50 percent of publicly traded companies are Delaware corporations. Sixty-five percent of Fortune 500 companies are Delaware corporations.
Almost one million companies have formed LLCs or corporations in Delaware. It has been the premier state for incorporating businesses since the early 20th century.
Types of Delaware Corporations
There are three main types of Delaware corporations.
Depending on which type of corporation your business chooses, you can create a unique structure with options.
A general Delaware corporation can raise capital as needed and go public when it wants to.
A close Delaware corporation is a small, tight business group.
A non-profit Delaware corporation is a charitable organization.
Drawbacks of a Delaware Corporation
The benefits of becoming a Delaware corporation are clear, but there are also drawbacks.
Delaware corporations MUST pay the annual franchise tax in states where they are doing business as well as in Delaware.
A Delaware corporation must have a registered agent for the service of process. The annual fees for this vary, but a general range is between $129 and $149 per year.
A Delaware corporation will also have a second layer of reporting requirements. For businesses that aren't headquartered in Delaware but are incorporated there, you'll have to follow the reporting requirements of two states.
It's very possible that the benefits of a Delaware corporation far outweigh the drawbacks. It's important to consider the options and negatives before filing your business as a Delaware corporation.
How Delaware Law Affects Workers Everywhere
It's no long shot to say that Delaware is the center of the business universe. With two-thirds of Fortune 500 companies incorporated there, some of the largest business call Delaware "home."
Home is a term that should be liberally understood when referring to these businesses. Consider Coca-Cola, Apple, and American Airlines, all of which are Delaware corporations. Though incorporated in Delaware, none of these businesses have headquarters in Delaware, nor do the majority of their employees reside in Delaware.
So what's the major draw for these companies to become Delaware corporations? Many speculate that it's to minimize tax liability or for anonymity. There's one other major attraction for businesses to come to Delaware.
The Chancery Court
For Delaware corporations, all legal cases are decided by one of the five judges of the Chancery Court. This court has no juries and is well known to side with and favor businesses. This, of course, if a major draw. It's in the state of Delaware's best interest to make sure that state laws and legal cases favor businesses. Forty percent of the state's revenue comes from Delaware corporation fees.
The idea for Delaware's Court of Chancery isn't new. It actually comes from 14th century England. A king's chancellor would hear all disputes that might require authorities to order someone to change their behavior or pay for damages.
Most U.S. states had Courts of Chancery, but those were merged with other courts to save costs. But this wasn't the case in Delaware.
The Court of Chancery in Delaware was established in 1792. The judges that sit on the Court of Chancery have become known as some the most knowledgeable experts in business law. Delaware common law has largely become the national law of corporations. And not all of these courts are in major cities. Some are located off the beaten path in cities that might have more chickens than people.
The dominance of the Court of Chancery in Delaware may be highly beneficial to corporations, but not to the workers of America. One simple rule that must be enforced by the Court of Chancery can show this clearly.
In Delaware, a company's directors must at all times maximize profits for shareholders. No matter how these decisions will affect the company's employees or the environment, the company must work to raise the share prices. Other states have provisions that allow a business to take into account the employees or other stakeholders, not just shareholders.
It has been argued that Delaware law is undemocratic. The state of Delaware is only minimally affected by a company's business and yet it dictates the governing rules for a how a company treats people that are located in other states. The power given to the state of Delaware to make these business decisions has minimal or no accountability.
On top of this, there's no incentive for Delaware to make changes. Delaware receives a lot of money from the businesses that incorporate in Delaware. If it changed its laws to be more favorable to employees, the businesses would leave, reducing Delaware's income.
Corporations are some of the most powerful voices in America. Is this the right way to govern them?
The corporation in its present form is relatively new. Prior to the 19th century, corporations had to be approved by the government. Delaware was the state to change that.
The Delaware Court of Chancery became very popular with corporations. Businesses felt (and still do) that the judges on the Court of Chancery understood how a business functions and therefore were qualified to make legal business decisions.
Today, it's very simple how judges on the Court of Chancery assess what's in the best interest of a company. The judges want to make sure that managers and directors are using their best business judgment to benefit shareholders. If that is true, that is considered the best interest of the company.
What benefits a company and its shareholder might not benefit the employees or the customers.
As Delaware has no incentive to become more employee-friendly, it continues to strive to be more business-friendly, attracting more and more businesses to incorporate there.
One example of this was a case in 2009.
Delaware was concerned that other states were creating laws that were attracting businesses away from incorporating in Delaware. So the state passed a law that allowed legal cases with more than $1 million at stake to be held in private arbitration. This meant that the case wasn't public. The public would never know what went on behind the closed doors.
There was a lawsuit challenging the statute and the case was won, which nullified the statute. The Supreme Court declined to hear the case, leaving the decision in place.
There's no motivation or incentive for states, including Delaware, to make their laws more employee- or customer-friendly. So they don't do so.
There is hope, though. States could make laws stating that a corporation can be governed where their principal place of business is located. For most corporations, that wouldn't be Delaware.
Another possible fix would be to use national law instead of state law to govern corporations.
Corporations and the State of Delaware benefit from laws that focus on benefiting the shareholders. But it's becoming clear that this likely doesn't benefit the rest of the nation.
Corporate Secrecy in Delaware
Since 2009, a strong front has been put up across the world to reduce the secrecy given to corporations. This resistance is campaigning against money laundering and tax evasion.
Support has ranged from the Obama administration to international law enforcement agencies to anti-corruption activists to major American allies.
The international discussion was followed by legislation in the U.S. for stronger disclosure rules, but not everyone in the U.S. was a supporter.
The loudest voice against these new regulations was that of Jeffrey Bullock, the Secretary of State for Delaware, who argued that these regulations could harm Delaware's major business of attracting incorporation in the state, causing an $800 million deficit.
One of the proposed laws would require states to track a company's true owner. The international push against shell companies was a threat to the appeal of Delaware as a secretive home for corporations.
The pushback against these new regulations has been strong enough that the proposed law from 2009 is still languishing. Bullock became a leader against the fight for this law, though he was by no means the only person to speak out against it.
Today, it's as easy as ever to register a corporation in Delaware. This is great for legitimate businesses, but it's also great for illegitimate and illegal businesses. Delaware is a magnet for shell companies that want to avoid taxes and launder money to conceal illegal activity such as drug trafficking or terrorist financing.
While the law struggles, Delaware continues to do well. The number of businesses to incorporate in Delaware is up by 34 percent. Revenue surpassed the $1 billion mark for the first time in 2015. The state deficit that was $800 million in 2010 is now zero.
Delaware has made a few moves to fight against corporate secrecy. The state has tightened its regulations and oversight of "registered agents" or third parties who act on behalf of the corporations that are registered in Delaware.
Bullock has admitted that corporate secrecy is a problem and that there needs to be tools for law enforcement to be able to uncover the identities of corporation owners. He also stated that the federal government should be responsible for the burden that this might place on states and for making the process more transparent.
Though the vast majority of corporations are registered in Delaware and the majority of corporations registered in Delaware are legitimate, there have been some famous cases of illegal businesses registered in Delaware.
As just one example of many, Mexico cartel kingpin Joaquin "El Chapo" Guzman allegedly used a Delaware corporation tequila business to launder drug money.
There's no way to determine exactly how much illegal money and funds go through secrecy havens, but an analysis of International Monetary Fund data by Global Financial Integrity estimates that $1.1 trillion in dirty money was transferred out of developing countries in 2013.
The many benefits of registering as Delaware corporations, such the low fees, the quick registration, and the easy filing, make Delaware attractive to corporate America. The laws of Delaware and the Chancery Court also make it highly attractive to businesses, large and small.
But that's not all. The state has found ways to make it even easier for businesses to become Delaware corporations. The Corporations Division of Delaware's Department of State has 11 employees that work in two shifts. The office is open until midnight to accommodate urgent filings. If you put your request in before 9 p.m., you can have your corporation registered within an hour for just $1000.
The ease of filing in combination with the secrecy afforded business owners makes Delaware practically irresistible to business owners.
America Is An Outlier
An international group that is comprised of three dozen nations was formed to combat money laundering and terrorist financing around the world. This organization is known as the Financial Action Task Force or FATF.
In 2006, FATF found that the U.S. has "significant shortcomings" and was "non-compliant" in 40 categories. One of the major concerns was that the authorities couldn't find a company's true owners in a timely manner.
A similar conclusion was reached by the U.S. Government Accountability Office in the same year. Delaware was specifically mentioned in that report.
Since these reports were made, many laws have been proposed and stalled throughout the U.S. government. There are major supporters, such as former president Barack Obama, but there are also major detractors with powerful roles throughout the U.S. government.
The fight against shell companies and corporate secrecy has continued, but the proposed bills remain stalled or rejected. In 2013, the U.S. was pressured by the G8 to improve their laws against anonymous shell corporations, but nothing has happened.
In 2014, a bill was proposed as an alternative. The bill would require that corporations provide a "responsible party" to register for an IRS identification number. The IRS identification number would give law enforcement officers more information and traction in money-laundering and terrorism cases.
Detractors say that the proposed bill wouldn't go far enough.
A new rule was unveiled in May 2016 that would require banks to begin more thoroughly vetting business owners by 2018. Detractors say that the U.S. Treasury's definition of a beneficial owner is too broad and won't combat the problem.
1209 North Orange
Some of the largest names in business are "located" in this nondescript Delaware building. On paper, some of the biggest businesses operate here. That list includes American Airlines, Apple, Bank of America, Berkshire Hathaway, Cargill, Coca-Cola, Ford, General Electric, Google, JPMorgan Chase, and Wal-Mart. Each has only a post box at this address.
The address not only attracts these big names, but also some infamous names in the money-laundering game. Having a business at this Delaware address helps businesses to skirt taxes, avoid regulations, and work with business-friendly courts.
The problem with all of these benefits is that they attract the bad type of business. And Delaware isn't the only U.S. state with this problem. Nevada, Wyoming, and Oregon have also been cited by the Financial Crimes Enforcement Network, which is a division of the U.S. Treasury Department, for being "particularly appealing" for companies who want to form a secret shell company. Delaware offers the most secrecy of the four states.
When tax havens are mentioned, most people consider the Caymans, Luxembourg, and Switzerland. But there's no need for U.S. businesses to go so far away. The Tax Justice Network actually labeled the U.S. as number one on its Financial Secrecy Index in 2009. Delaware was cited as one of the major reasons.
Should I hire a lawyer to help me incorporate my business in Delaware?
The filing process to register a business as a Delaware corporation is simple, but if you'd like help, there are plenty of agencies set up to do this. The filing fees are generally considered affordable.
Is it expensive to register as a Delaware corporation?
No. Delaware has some of the lowest fees to register a corporation.
How long does it take to register a Delaware corporation?
The time varies, but in general, your corporation should be registered one to three weeks after filing. If you need your corporation registered faster, you can pay expediting fees. A corporation can be registered in Delaware in as little as an hour.
If you have any questions about how to register your business as a Delaware corporation, post your legal needs on UpCounsel for help. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.