By incorporating your business, you can increase funding and grow your business. Corporations also have their own legal existence, which means they are a separate entity from the owners, called “shareholders.” This provides additional legal protections over business structures such as partnerships and sole proprietorships. You’ll have different rules depending on the type of corporation you choose:
- C corporation: When most people say “corporation,” they’re referring to a C corporation. Like other corporations, it is its own legal entity. It requires extensive record-keeping, and every action must be recorded and organized. C corporations can be advantageous because they allow for an unlimited number of shareholders, meaning they can typically raise the most capital.
- S corporation: An S corporation is designed to avoid the double taxation that comes with C corporations. This structure allows for business profits to pass through to the owners’ personal income, avoiding corporate tax rates.
- Nonprofit corporation: A nonprofit corporation files with the IRS to get a tax exemption. Nonprofits have a very organized and strict set of rules they must adhere to in order to keep their nonprofit status. These corporations typically do charitable, religious, educational, scientific, and literary work.
How do I form a corporation in Delaware?
Steps to form your Delaware Corporation
- Name Your Corporation
- Appoint Directors
- Choose an Delaware registered agent
- File the Delaware Certificate of Incorporation
- Create Corporate Bylaws
- Draft a Shareholder Agreement
- Issue Shares of Stock
- Apply for Necessary Delaware Business Permits or Licenses
- File for an EIN and Review Tax Requirements
- Submit your corporation’s first report
To start a Delaware corporation, you must file a Certificate of Incorporation with the Secretary of State. The Certificate of Incorporation is what legally establishes your business as a corporation. There are several steps you must take to become a corporation. We’ll walk you through every step to simplify the process so that you can incorporate your business.
To simplify the process of forming a corporation in the state of Delaware, we’ve put together 10 steps to form your business:
Step 1: Name Your Delaware Corporation
Naming an entity can come with several requirements, and if you were to use an incorrect word in your corporation’s name, your file could be rejected. Corporations in Delaware are not allowed to use any variation of the word “Bank” unless they are an official financial institution. This is because Delaware wants to avoid confusion about whether the corporation is a bank to the public.
Delaware requires every corporation to have one of these words, or their abbreviations, in the corporation’s name:
To reserve a name for your corporation, you must go through the Delaware Division of Corporations. However, Delaware does not require that you reserve your corporation’s name when you are initially forming it.
Thankfully, Delaware makes it easy to see if your derived corporation name is available with an entity search tool that allows you to see inactive and active entities. Searching to see if a name is available is simple and free.
The Delaware Division of Corporations recommends that you reserve your corporation’s name, as it can guarantee that the name is reserved for 120 days. Delaware offers entity name reservations online or by fax or mail for a fee of $75. After the initial 120 days, you can renew the corporation’s name for another 120 days.
When naming your corporation, you should consider trademarks and “doing business as” (DBA) names.
There are two types of trademarks: state and federal. State trademarks tend to be easily attainable, while federal trademarks take a bit more effort. If you trademark the name of your corporation in the state of Delaware, you will only have protection there. The fee for filing a trademark application with the Secretary of State is $25, but you’ll need to pay an additional $10 to receive a Certificate of Registration.
On the other hand, a federal trademark helps to protect your business nationally, as it is maintained by the United States Patent and Trademark Office (USPTO). Any business is subject to trademark infringement lawsuits. These lawsuits can prove costly, which is one of the many reasons you should check to see if your corporation name has been federally trademarked or trademarked in the state of Delaware.
A “doing business as” (DBA) name, also known as an assumed name, fictitious name, or trade name, can be registered in the state, county, or city where the corporation is located. Having a registered DBA name does not legally protect your corporation; however, Delaware requires registration. DBA names can be registered in the Prothonotary’s office in the county where you are running the corporation.
When registering your DBA name, you will need to list the:
- Name of the corporation
- Business address
- Phone number
- Names and address of business owners
- Date of formation
- Nature of business
Step 2: Appoint Directors
After you’ve handled naming your corporation, it’s important to appoint directors. In fact, Delaware requires that every corporation has a board of directors with one or more members. The board of directors manages the corporation and acts as the governing body.
The Certificate of Incorporation and accompanying bylaws will govern the duties of the director(s). It is important to set guidelines for the board of directors since they have a significant amount of power in the corporation.
When a corporation is first formed, they have initial directors, noted in the Certificate of Incorporation. The first director(s) serve until the shareholders have their first meeting. During this meeting, the shareholders will elect the next board of directors. Shareholders meet annually and will discuss and elect the new board of directors every year after.
Step 3: Choose an Delaware Statutory Agent
Delaware requires every corporation to have a registered agent. Having a registered agent is essential when running a corporation because they receive important legal notices and act as the main point of contact between your corporation and the state.
To qualify as a registered agent in Delaware, you must be a Delaware resident or entity authorized to do business in Delaware . The agent must have a physical street address in Delaware and be available to receive legal documents for the corporation.
Although you could serve as your own registered agent, it can be difficult to meet every requirement. To begin, there must always be a registered agent available during normal business hours. This point is among the most critical when deciding who will be the registered agent, as corporations can face legal repercussions if their registered agent is not available to receive a legal notice.
Step 4: File the Delaware Certificate of Incorporation
Next, you’ll need to file your Certificate of Incorporation. The Certificate of Incorporation, otherwise known as the Articles of Incorporation in other states, is a legal document that outlines your business structure and is used to establish your corporation.
When filing, you will need to fill out a form asking for your corporation’s name, business purpose, the number of shares offered, the value of shares, directors, officers, etc. If your corporation physically operates in multiple states, you will need to file for incorporation in those states, as well.
- Corporation’s name: Ensure that the corporation’s name does not have any trademarks before using it.
- Registered agent: The name of the registered agent and their address as agent (called “registered office”).
- The number of shares: List the total number of authorized shares and their par value (if any).
- Incorporator: The name, address, and signature of the person completing the form.
The Certificate of Incorporation can be submitted online, using the Document Upload Service, or by mail with a cover memo that includes the corporation’s name, return address, and phone numbers. The minimum filing fee is $89, but this could be more depending on the number of shares. Delaware has a calculator to help you determine your fee.
Step 5: Create Corporate Bylaws
Corporate bylaws outline the rules for the board of directors once the business is incorporated. As long as the corporate bylaws do not contradict the law, Certificate of Incorporation, or the rights of its directors, officers, employees, or stockholders, it’s good to go.
Essentially, bylaws lay out the procedures and operating rules for a corporation. Although it’s not required in every state, Delaware requires every corporation to have bylaws. Bylaws do not have to be publicly filed, but they must be stored and followed by your corporation.
A corporation’s bylaws may include the:
- Corporation’s name
- Principal place of business
- Designation of the corporation (public or private)
- Number of shares and stock
- Board of directors
- The terms of service for the board of directors
Step 6: Draft a Shareholder Agreement
A shareholder agreement is an agreement between those within the business. A shareholder of a corporation is someone who owns one or more shares of company stock. This agreement ensures that everyone’s rights are outlined. Having a shareholder agreement allows corporations to control the business’s voting and ownership, settle any discrepancies, and plan for future investments.
Shareholder agreements must comply with state and federal laws. The U.S. Securities Exchange and Commissions (SEC) regulates the federal laws surrounding this agreement.
In Delaware, the shareholder agreement is known as the stockholder agreement. Although the state of Delaware does not require all corporations to have this agreement, it’s wise to create one, as it details how corporations should be managed, how shares can be transferred, and more.
Typically, shareholder agreements can include:
- Transfer options
- Restrictive covenants
Step 7: Issue Shares of Stock
Corporations must be transparent when it comes to their number of shares. Issued shares are the authorized shares that are sold to and held by the company’s shareholders. Issued shares must be recorded and shown in the company’s annual report. A company can issue a share once. As a result, companies often buy back their own shares, which remain listed as issued. The company can then resell the issued shares whenever they choose.
It’s important to record the issued shares properly, as they are recorded in the company’s balance sheet as capital stock. Afterward, any outstanding shares are listed in the company’s quarterly filings, which go to the SEC. Properly recording issued shares helps investors and analysts measure the company’s value and performance, as it’s used when calculating market capitalization and earnings per share.
In terms of ownership, issued shares help determine the owners of the corporation, as it identifies the initial investors. Owners can predict their position as shareholders by measuring issued stock and authorized stock, which is the maximum number of shares that a corporation can legally use.
Public companies can sell stock to raise their capital. Company owners and founders can use stocks to build their equity and help the company grow. Public companies must file quarterly to reports to the SEC since they play a role in the U.S. stock exchange. A private company, on the other hand, cannot rely on selling stocks to raise capital. Private companies can often sell some of their stock, but they are limited to the number of shares they can sell without registering with the SEC.
Step 8: Apply for Necessary Business Permits or Licenses
The Delaware Division of Revenue requires every corporation conducting business or trade in the state to have a Delaware business license. You will need a Delaware business license before you can conduct any business. You can apply for this online. Additionally, you might be required to register with your local government, as some cities and counties require specific business licenses.
When applying for permits and/or licenses in Delaware, you must also consider federal law. Not all corporations will need federal licenses or permits, so it’s important that you verify whether your business activities are regulated by a federal agency. Some common industries that are federally regulated include agriculture, alcohol, aviation, firearms, fish and wildlife, and more.
Step 9: File for an EIN and Review Tax Requirements
Once your EIN application has been approved, you will receive an EIN confirmation letter. If you applied for the EIN online, you would receive the EIN at the end of the application. If the form was sent via fax, you should expect to receive the confirmation letter within a week. Lastly, if you sent the form by mail, you should receive your form anywhere between a month and two months.
Step 10: Submit Your Corporation’s First Report
The first report, also known as the initial report, is often required within the first days as a corporation. Every state has different laws regarding the first report, and many do not require it. For example, Delaware does not require an initial report. Instead, the Secretary of State requires an annual report. When this report is due, you will also need to pay a franchise tax. Every corporation will need their president, secretary, treasurer, directors, and authorized individuals to sign this document. Their signatures certify they are reporting on behalf of the corporation.
How much does it cost to start a corporation in Delaware?
Starting a corporation in Delaware costs a minimum of $89 when filing your Certificate of Incorporation. From there, you may have to pay a county fee. You must then pay an annual report filing fee of at least $50 due on March 1.It is required to complete this form online every year.
Here are some of the fees you can expect when starting a corporation in Delaware:
- Name reservation: $75
- Domain name registration: $25
- Franchise tax: $50 plus the franchise tax (calculated based on two methods)
There are many fees when starting a corporation, and missing deadlines can end up costing you more. For instance, if a corporation does not file the annual report and pay the franchise tax, they will face a penalty of $200 plus 1.5% interest per month on the penalty and tax. The minimum for the Delaware franchise tax is at least $175 but can go much higher.
ZenBusiness can reduce your time spent on paperwork by assisting in this process for small businesses in Delaware.
What are the benefits of a corporation in Delaware?
Aside from residence in Delaware, many businesses choose to incorporate in this state because of the various benefits:
- Privacy: Corporations don’t have to disclose director or officer names in their formation documents.
- Structural flexibility: Corporations and their board members do not need to be residents of Delaware, and there only needs to be one shareholder, officer, and director of a corporation.
- Established legal system: Most corporate attorneys are well aware of Delaware business law. Delaware has a non-jury court called the Court of Chancery made up of judges who are experts in corporate law, which expedites rulings.
- Tax savings: Many Delaware tax laws are very favorable to corporations. For example, the state doesn’t tax royalty payments or similar “intangible assets.”
- Limited liability: When a business becomes incorporated, the owner does not assume legal liability.
- Allows stock to be issued: Stock is issued when the corporation is initially formed and is easily shared.
- Establishes an official business: Having an established business attracts more customers.
- Recognized outside the U.S.: You can partner with other corporations in different countries.
Although there are many advantages to starting a corporation in Delaware, it does come with some drawbacks. To start, there are additional costs to starting a corporation in Delaware. For instance, Delaware corporations will have to pay a recurring franchise tax, which can prove quite costly.
Starting a corporation anywhere will require adjusting to a corporate shift. There will be additional red lines and standards to go through and a need for meticulous record-keeping.
How is an Delaware corporation taxed?
Delaware requires corporate income tax return information and any additional documents to be filed in paper form. Although there is no sales tax in Delaware, some businesses might be subject to Delaware’s gross receipts tax.
You’ll have to pay federal and state payroll taxes if you are a corporation with employees. The state has a progressive income tax, which means that employees making more receive a higher income tax.
Additionally, corporations could be subject to additional taxes depending on the city in which they are located. For example, employers in Wilmington will need to pay a local city tax and will have to withhold 1.25% of their employees’ paychecks.
Here is how Delaware taxes different corporations:
- C corporations: C corporations doing business in Delaware will need to file a corporate income tax return. The state doesn’t have a minimum corporate income tax. However, corporations will need to pay a tax of 8.7% on federal taxable income.
- S corporations: All S corporations in Delaware must file an S Corporation Reconciliation and Shareholders Information Return form. Delaware recognizes the federal rules surrounding S corporations and does not impose a corporate income tax on “pass-through” income.
- Nonprofit corporations: In contrast, nonprofit organizations are exempt from the Delaware corporate income tax. Even though nonprofits do not need to file a Delaware corporate income tax return, they must file an annual report with the Delaware Division of Corporations.
Delaware Corporation FAQs
- Does running a corporation in Delaware involve more paperwork than running other types of businesses?
Running any corporation will require additional paperwork than other types of business. This is because corporations must meet more federal and state regulations. Since public corporations deal with stock, they must be regulated to ensure that only the truth is reported to the SEC.
- What is the difference between an LLC and a corporation in Delaware?
A limited liability company (LLC) tends to be more relaxed than a corporation. This structure doesn’t have a board of directors, for instance, and tends to require less paperwork.
- How do I change my corporation’s name in Delaware?
To change your corporation’s name, you need to file an amendment with the Delaware Division of Corporations.
- How many people are needed to form a corporation in Delaware?
You only need one person, the incorporator, to form the corporation.
- Can I form my Delaware corporation online?
Yes. You can upload all of the necessary files here.
- How do I dissolve my Delaware corporation?
To file for dissolution, you will need to pay $204 and file the Certificate of Dissolution. If the document is more than one page, you will need to include an additional $9 for every page.
Before the certificate can be filed, the corporation must have filed all of the taxes due to Delaware (annual franchise tax report). Fill out this form to dissolve the corporation.