Delaware Incorporation: Everything You Need to Know
Updated November 27, 2020:
Delaware incorporation is often favorable. Corporations from all over the world and the United States are incorporated in Delaware. The main reason is Delaware’s legal system which creates clarity for businesses given that rulings are made by judges and the massive number of cases that have been tried there. Delaware also has favorable laws for holding companies that allow businesses to reduce their tax bill.
The Benefits of a Delaware Corporation
Delaware is the most popular place in the United States for companies to be incorporated due to its flexible business laws and favorable legal climate. It has been recognized by the U.S. Chamber Institute for Legal Reform as the best state to incorporate for 10 years in a row.
Over 50 percent of publicly-traded companies in the U.S. and 65 percent of Fortune 500 companies are incorporated in Delaware. Nearly 1 million companies are incorporated in Delaware
Due to the benefits of incorporating in the state of Delaware, over 50 percent of publicly-traded companies in the U.S. and 65 percent of Fortune 500 companies are incorporated in Delaware.
Delaware has been the leading state for incorporating businesses since the early 20th century, and almost 1 million companies have formed corporations or LLCs in the state which is equivalent to the state’s population. Delaware’s government is committed to keeping the state’s legal code business-friendly so that it continues to attract businesses to incorporate in the state.
There are three major types of corporations:
- General - General corporations can raise money by issuing stock.
- Close - Close corporations tend to be smaller and rely on owners’ capital or smaller investments.
- Nonprofit - Nonprofit organizations are organized around a mission rather than achieving a profit.
Every corporation incorporated in Delaware is required to file an annual report by March 1 which provides insight into the corporation, its activities, and major directors and executives. There is no need for these officers to be Delaware residents nor are they responsible for any sort of income taxes on profits or sales of stock.
Corporate laws and the Court of Chancery
The number one selling point for Delaware is its business laws, legal climate, and favorable precedent. Delaware has its own court system to settle business matters - the Court of Chancery. In these courts, rulings are made by judges rather than juries, thus there is less chance of a surprise outcome for corporations.
Given the ubiquity of Delaware incorporation in the business world, most lawyers study Delaware’s laws and rulings during law school. Therefore, most corporations know how the case will be ruled given that a judge makes the ruling and the large number of cases that have already been ruled on in the Court of Chancery. So, there is less uncertainty for corporations around legal rulings and costs.
Another attractive reason to incorporate in Delaware is that holding companies are exempt from paying corporate taxes in Delaware. This essentially means that any corporation can form a holding company in Delaware which houses the company’s intellectual property. The entity actually doing business can lease the intellectual property from the holding company. The holding company won’t have to pay any income tax from the proceeds of this arrangement.
Companies use this feature of Delaware’s tax code to minimize their own tax bill.
Filing fees are a large source of Delaware’s revenue. Therefore, the state is incentivized to keep the process quick and simple to retain the companies already in Delaware and attract new businesses to the state. The state asks very little in terms of personal information of the business’ owners, executives, and directors which is enticing for people concerned about privacy.
Delaware requires annual reports to be filed on March 1. However, these reports can be quickly filled out and filed online. They ask for very little information and are not a burden for companies especially compared to other states.
Given the popularity of companies incorporating in Delaware over the last 50 years, it has certainly become a status symbol for young companies to prove their bona fides. It also carries cachet and makes the business more attractive to investors, bankers, and executives given their familiarity with how Delaware’s business laws work.
Are Delaware Corporations Advantageous for Small Businesses?
Yes, Delaware’s laws create similar advantages for small businesses as they do for large corporations. Most notably, laws in Delaware allows a clear separation between personal and business assets. Therefore, any business liabilities will not result in the seizure or forfeiture of personal assets.
Additionally, holding companies in Delaware are not obligated to pay sales taxes or require any sort of license. While corporations must file an annual report, there is no requirement for LLCs.
Can I incorporate in Delaware if I live in a different country or state?
Companies that want to be incorporated in Delaware must have a registered agent in the state. No one in the business is obligated to live or work in Delaware. Thus, Delaware’s friendly business climate and low taxes are open to non-residents as well.
The benefits of incorporating in Delaware as a nonresident
Some additional benefits to incorporate in Delaware for nonresidents are no inheritance tax for nonresidents, no sales tax, no state corporate income tax, and no property taxes. Overall, Delaware is the cheapest state to do business especially if you are doing business in multiple states. The state’s legal system ensures that any dispute will be settled quickly and fairly.
Should I incorporate in Delaware or start an LLC?
Although several variables can influence this decision, the main difference is that corporations have more obligations to meet than LLCs. Corporations require formal resolutions and shareholder meetings in addition to the recording and filing of forms. LLCs are much more casual with less formality. There are no similar requirements and forms can be simply filed with the IRS.
However, for larger companies, incorporation is the better option since it comes with prestige and allows companies to sell stock and raise large sums of money.
How to Incorporate in Delaware
To incorporate in Delaware, you must file a Certificate of Incorporation with the Delaware Division of Corporations which can be found on its website. Some of the required information includes the name of the corporation, the registered agent’s information, the amount of stock, and the value of each share. The filing fee is $89, and it typically takes two to three weeks for this form to be processed.
Delaware incorporation costs
The state of Delaware charges:
- $89 filing fee for incorporation
- An additional $50 fee for same-day approval
- Companies with more than 1500 shares at no par value will be charged a higher fee anywhere from $0.004 to $0.004 per share
- Companies with an assigned par value will be charged at a rate between $0.04 and $0.20 per $1000 stock depending on the total value of the stock
You can find a fee calculator on the Division of Corporations website.
Delaware corporation maintenance costs
The filing fee for annual reports is $50 for domestic companies and $125 for foreign corporations. Delaware also has an additional franchise tax which is the lower of the assumed par value capital method or authorized shares method. The assumed par value capital method compares the company’s total assets against its number of issued shares. The authorized shares method’s sum depends on the number of authorized shares with a nominal amount for companies with a few shares and a maximum amount of $180,000 for companies with millions of shares.
Are Delaware corporations required to have bylaws?
Delaware corporations are not required to have bylaws, although it is a good idea for corporate governance purposes. Bylaws create standards and consistency when it comes to high-level decision making. It details internal functions, responsibilities of directors, and the corporation’s decision-making structure.
Many companies spend large sums of money to draft bylaws that reflect their values. These bylaws can impact the company decades into the future. Although bylaws are not required by Delaware, they are mandatory for many investors and financial institutions.
In recent years, Nevada has also grown in popularity as a destination for incorporation. Nevada has no state income tax on corporations and charges no fees on corporate shares. Additionally, there is no state income tax or corporate taxes other than filing fees. Like Delaware, shareholders, directors, and executives do not have to be residents of Nevada.
Doing business in other states
Foreign qualification allows companies to operate in states other than where they are incorporated. Often, corporations have to qualify in their home state where they do business and have offices because they are incorporated in Delaware. These costs and burdens need to be taken into before you decide to incorporate in Delaware.
If you need help incorporating in Delaware, you can post your legal needs on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. 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.