93% of all US-based initial for-profit corporations and 68% of Fortune 500 companies are registered in the state of Delaware.
One of the things that stands out about incorporating in Delaware is the Delaware Court of Chancery, the oldest business court in the United States and the only corporate court system in America with no juries, allowing corporation owners to resolve possible conflicts in fairness and privacy.
Incorporating in the business-friendly state comes with significant tax advantages, and if you’re ready to get your business off the ground, we’ve broken down the process of incorporating your business in Delaware in this step-by-step guide.
1. Select a name for your corporation
The first step in the process of incorporating your Delaware business is deciding on a name. However, the name must adhere to the Delaware naming guidelines below:
General corporate name guidelines
When deciding on a name for your Delaware corporation, it must include one of the following words or abbreviations:
Company, association, club, corporation, foundation, Inc., fund, institute, union, society, limited, syndicate, or words of similar meaning in other jurisdictions.
These words or abbreviations must also be written in Roman letters or characters
The Delaware corporation name must also be easily distinguishable and not too similar to other existing business names in the state
Additionally, do not include words such as trust, bank, or any other abbreviation of these words.
Trademark
A trademark links your corporation name to the marketing, sale of goods or services, and contract value in the marketplace. Proper or uniquely registered names are considered viable trademarks, while internet domain registration with the Secretary of State does not automatically make a trademark possible.
However, same-name conflicts are prohibited by the Delaware Secretary of State’s office. This is even if a registrant or corporation is a part of a completely different industry from a previously registered company.
Entity name
The entity name of your Delaware corporation is the legal name by which the state identifies your business. To ensure that the name is available, conduct a name availability search on the Delaware Division of Corporations business search portal.
DBA (Doing-business-as) name
A DBA or (doing business as) name is also known as a “trade name” in the state of Delaware. This trade name allows you to use a name other than your business’s legal or entity name.
A DBA or (doing business as) name is also known as a “trade name” in the state of Delaware. This trade name allows you to use a name other than your business’s legal or entity name.
To apply for a DBA, you must register in each county you plan to do business in. Thereafter, submit the Registration of Trade, Business, and Fictitious name certificate with the relevant county Clerk’s office via mail or in-person.
2. Nominate a registered agent
Your corporation needs to have a Delaware-registered agent. You are in charge of nominating this individual, and their primary purpose is to accept legal notices, official documents, and service of process on behalf of your corporation.
Think of your registered agent as your business’s point of contact with the state.
You may nominate anyone to be your corporation’s registered agent. However, they must meet a few requirements:
- The agent must be available in person to sign for legal documentation and service of process during normal business hours
- The agent must have a physical street address in Delaware and not a PO Box address
- The agent must reside in Delaware
3. Appoint initial directors at the organizational meeting
You need to hold an organizational meeting before filing the Certificate of Incorporation. A few tasks will need to be completed during this organizational meeting, including determining your corporation’s share structure, creating and approving bylaws, and appointing initial directors.
You need to appoint a minimum of one director to oversight the corporation until the first shareholder meeting.
This individual is referred to as a corporate director, and they are tasked with the amendment, adoption, and appeal of the bylaws in conjunction with supervision, election, and removal of officers.
After incorporating, the board of directors will need to be elected by the incorporators, and the officers will need to be appointed by the initial directors.
4. File Articles of Incorporation
The Articles of Incorporation or Certificate of Incorporation marks the formation of your corporation. Important information that should be included in the articles is:
- The corporation’s name
- The name and street address of the registered agent’s office
- The purpose of the corporation
- The number of shares the corporation is authorized to issue
- The name and the mailing address of the incorporator
You’ll need to download the Certificate of Incorporation-stock corporation Form or sample template from the Delaware Secretary of State’s website. After completion, ensure that you file it online with the Secretary of State’s office.
This Certificate of Incorporation Form can only be used to start a business with one share class. In the event that you are looking for a multiple share structure, you’re welcome to create your own Certificate of Incorporation as long as it is in line with the Delaware state statutes.
5. Create and approve bylaws
Your corporation’s bylaws are an internal corporate document laying out all of the rules and priorities for running the organization.
It’s not a legal requirement to have corporate bylaws; however, you should adopt them, in any case, to establish your corporation’s operating rules, create credibility with creditors, banks, and the IRS, as well as legitimize your corporation.
After creating and approving bylaws, ensure that they are kept in a safe place for access as and when needed.
6. Select a share structure
Irrespective of whether you plan to issue stock or not, the par value of the shares and the amount of stock still need to be approved. This is because the shares of stock determine Delaware franchise taxes. So, where possible, corporation business owners opt to minimize the number of shares.
Therefore, it is recommended that you only authorize what you think you might need when you form a corporation. Most corporations containing 5,000 authorized shares pay the minimum Delaware Franchise Tax yearly.
Corporations that go over 5,000 shares are given the opportunity to use two different methods to recalculate or adjust the corporation’s Franchise tax. The first is the authorizing shares method and the next one is the assumed par value capital method.
For a detailed explanation of how to use these two methods, refer to the Delaware Division of Corporations website.
7. Obtain an EIN
Your Delaware corporation needs a Federal Tax Identification Number. It’s also referred to as an Employer Identification Number or EIN. This number is a unique nine-digit code used by the federal government to identify business entities in every state.
To obtain an EIN, you need to complete the online application on the IRS website. The application is free of charge, and when completing it online, you’ll receive your EIN immediately.
Alternatively, you may download IRS Form SS-4 and mail it to the following address:
EIN Operation
Internal Revenue Service
Cincinnati, OH 45999
8. File Delaware state taxes
The following taxes are applicable to all Delaware corporations:
- Sales and use tax: While Delaware does not charge sales and use tax, you may be liable for sales and use tax if you plan on selling products and services in any other state aside from Delaware.
- Income tax: Anyone who is paid or takes earnings out of your corporation in Delaware needs to pay Delaware state income tax. For more on this, refer to the Delaware Division of Revenue website.
- IRS payroll tax: All Delaware corporations are liable for employer payroll tax to the IRS on all salaries paid to employees.
- Estimated taxes: Estimated taxes are due all year round by most Delaware corporations. This depends on the type of profit and income your company is making.
The standard type of estimated tax includes federal income tax, Delaware state tax, federal self-employment tax, and franchise tax. Estimated taxes are due for Tanzania.
- Corporate tax: Unless you’re a limited liability company or an S corporation, you must pay corporate tax. Corporations in Delaware must pay taxes on the corporation’s profits and file a corporate tax return.
In the event that those profits are distributed to stakeholders in the form of dividends, the individual will be liable for taxes as well. This is referred to as double taxation.
9. Delaware business licenses and permits
The following licenses are needed to legally operate your Delaware corporation:
- Delaware business license: A Delaware business license is required for all Delaware corporations doing business in the state.
- Seller’s permit: If you plan on selling products and services in the state of Delaware, then you need to buy a resale certificate each year. Even if your business is based online and involves shipping products to Delaware residents, sales tax must be collected. By having a sales tax certificate, you have the means to do so.
- Professional license: Delaware requires professional licenses in addition to the business license. In order to see what type of professions will require the additional licensure, visit the Division of Professional Regulations.
10. Annual report requirements in Delaware
Corporations in Delaware are required to file an annual report. The annual report is a collection of information regarding a corporation that must be submitted to the Division of Corporations after incorporation each year corporation. The annual report must be submitted by the 1st of March each year. You may submit your Delaware annual report online.
11. Costs of starting a corporation in Delaware
The filing fees below apply to all Delaware corporations:
- DBA name: $25 per county
- Certified copies of DBA: $60 for up to 5 pages
- Certificate of Incorporation: $100 or $115 if hand delivered
- Annual report: $50
- Delaware Certificate of Good Standing: Short-form – $50, Long-form – $175
Next steps after forming a corporation
You’ve recently started your corporation, and congratulations are in order. However, it is only the beginning, and now you’ve got to comply with Delaware corporate law to remain in good standing.
Here are some helpful tips to follow throughout the year.
Maintain detailed financial records
In order to record business transactions and maintain financial corporate records for the purposes of corporate tax returns, corporations are advised to use a double-entry bookkeeping system. This is the accepted standard method for recording all approved financial transactions of incorporation.
The double-entry accounting system ensures that the corporation’s financial activities are recorded in two accounts: a credit and a debit. Additionally, these accounts also document any changes in the corporation’s monetary values.
Separate the corporation from its owners
All documentation signed by directors, officers, and owners must be signed in the name of the corporation and not in their personal capacity. This includes banking activities such as loans, checking accounts, and other banking procedures.
If company documents are signed under the personal capacity of owners, the individuals become personally liable for the financial obligations. Therefore signing under the corporation status provides personal liability protection. Additionally, leases and contracts must be handled in the same way.
Hold directors’ and shareholders’ meetings
As per law, a corporation is required to conduct yearly shareholders’ meetings and directors’ meetings where business ventures are discussed and reviewed.
During these meetings, stock owners of the corporation are entitled to remove or elect directors, approve the sale of mergers and corporate assets, amend the Articles of Incorporation and bylaws and dissolve or terminate the corporation.
Document directors’ and shareholders’ corporate decisions
As per state law, businesses are required to hold meetings and also document and take minutes of each meeting, thereby recording decisions taken by directors and shareholders.
Making a note of these situations ensures that an owner’s or shareholders’ limited liability status is maintained and protected if ever audited by the IRS or questioned by creditors.
You should also check with your state to ensure that your new business has the relevant business licenses to operate legally in the state.
FAQs
A Delaware corporation is considered a taxable business entity formed in the state of Delaware, while an LLC is a limited liability company. They both require state filing once created, and they both exist perpetually. One of the major differences is that creating and managing an LLC is much easier and more fixable than creating and maintaining a corporation.
One of the major benefits of starting a corporation in the state of Delaware is that the state does not impose income tax on corporations that don’t transact business in the state. Additionally, shareholders who don’t live in the state need not pay tax on shares.
Lots of business owners choose to incorporate in the state of Delaware due to the quality of the courts and judges. In fact, the state has a special court referred to as the Court of Chancery. This unique type of court rules on corporate law disputes and has no juries. It’s also a tax haven for businesses.
In order said to submit a corporate income tax return in Delaware, you need to file Form 1100. The instructions for completing this form are available by contacting the Division of Revenue. The form must be filed on or before the 15th day of the third month following the close of the taxable year.
Incorporating your business in Delaware has many benefits as compared to incorporating a business in any other state. Delaware has some of the best state legal systems in the US, but one of the most advantageous reasons to start a corporation in Delaware is the liability shields provided when you incorporate in the state.
