What is a Delaware Corporation?
A Delaware corporation is a legally registered business entity in the State of Delaware. Incorporation allows a company to conduct business. There are two types of Delaware corporations, including C corporations and S corporations.
Benefits of Delaware Corporate Law
Delaware has made a concerted effort to establish itself as a desirable location for business incorporations. The state offers several critical advantages related to financial, taxation, legal, and privacy issues. In addition, businesses communities worldwide recognize the state as fertile ground for the next big startup.
Here are seven specific benefits associated with Delaware corporate laws:
- Tax Advantages. Delaware does not tax state-registered corporations doing business from another state. Additionally, shareholders, who do not live in Delaware, are exempt from state income tax on shares held in the state. Delaware is considered a “tax haven” due to these advantages.
- Corporation Court. Delaware’s Court of Chancery only hears cases involving corporations. The judges are corporate law experts. As a result, the court’s decisions are more predictable than those in other states. This advantage could be significant.
- Expedited Business Filings. Delaware’s commitment to corporations allows businesses to receive their documents on the same day of request, with many in as little as one hour. However, expedited business filings come with an additional cost and are often more expensive. Factor them into your budget and planning efforts to avoid unexpected issues.
- Privacy. Anonymity is essential for strategic business management and protecting competitive advantage. When you incorporate in Delaware, you are not required to disclose the names of your directors and officers to the state. This feature allows your company to maintain anonymity.
- No Residency Requirements. There is no requirement for residency. Officers, directors, and shareholders do not have to be Delaware residents. This option allows startups and businesses to solicit contracts across a wide geographic area.
- Director Flexibility. Delaware law permits a single individual to serve as an officer, director, and shareholder, which is advantageous for small businesses. Therefore, you do not have to pull together a typical team of corporate stakeholders to support your startup.
- Investors Love Delaware. If you’re looking for angel investors or venture capital, keep in mind that most of these investors prefer that you incorporate in Delaware. They enjoy the privilege and flexibility that the state provides, which allows them to maximize their investments.
Here is an article that discusses Delaware’s corporate law.
Why Do So Many Companies Incorporate in Delaware?
Companies incorporate tax advantages, corporation courts, flexibility, and privacy. Therefore, the state prioritizes support to corporations smartly and efficiently. For example, you can select a name, form a corporation, and get a Certificate of Good Standing (CGS) within a few hours without much pushback.
There are two other reasons why so many companies incorporate in Delaware:
- Predictability. There is a political consensus to keep laws current and relevant and seek advice from Delaware’s corporate law specialists on how to do so. Corporations want to operate under modern rules that clearly define what they are and are not permitted to do. Delaware’s promise to deliver responsively on corporate services attracts many businesses to the state.
- Expedited Dispute Resolution. The other primary reason corporations incorporate in Delaware is the caliber of courts and judges. Delaware has a special court, the Court of Chancery, that can resolve corporate law disputes without a jury trial. As such, corporations can expect corporate law judges to preside over their legal disputes for an expeditious resolution.
What is the Difference Between a Delaware Corporation and LLC?
There are several differences between a Delaware corporation and a limited liability company (LLC). However, the most significant difference is that a Delaware corporation can issue stock, whereas an LLC cannot. This difference significantly impacts a startup’s ability to raise capital, as many investors prefer investing in corporations with fewer limitations.
Here are three more differences between a corporation and LLC in Delaware to note:
- Organization. A Delaware LLC must have at least one manager and members who are also owners. An Operating Agreement is critical with an LLC because it details its structure, most formalities, and operating procedures. This document is also regarded as one of the reasons why a Delaware LLC is more adaptable than a corporation.
- Capital Capacity. Corporations can issue stock on the public market, and Delaware corporations are owned by their shareholders. Shareholders have the right to both issue and sell stock to raise capital. LLCs cannot issue stock, meaning that a business raises capital based on investor amounts.
- Voting Rights. When it comes to an LLC, you’ll notice that the LLC Operating Agreement is a standout feature, which is why it’s highly recommended. It can specify the voting rights of LLC members, which are pretty flexible. By contrast, all stockholders of corporations have voting rights.
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Requirements for Delaware Corporations
There are two kinds of legal entities available for incorporation in the State of Delaware: S-Corp and C-Corp. To incorporate in Delaware, businesses must submit all required documents to the Secretary of State’s office and then pay service fees for the corporate formation process. A Delaware corporation is ready to operate once the business owner receives the Articles of Incorporation.
Below, we’ve outlined three additional requirements for forming Delaware corporations:
Requirement 1. Documents
The requirements for forming a Delaware corporation are identical for residents and non-residents seeking to create a Delaware corporation. The following documents are required for the formation of a Delaware corporation:
- Annual report
- Articles of Incorporation
- Corporate bylaws
- Financial statements
- Founders’ agreement
- Meeting minutes
- Shareholders’ agreement
If you do not have these documents, corporate lawyers have training and experience. They can also offer you legal advice so that you achieve the legal and financial outcomes that your company desires. Otherwise, you could make errors that impact you significantly in the future.
Requirement 2. Unique Corporation Name
The corporation’s name must be unique to meet Delaware’s corporation requirements. Before the incorporation process is complete, business owners can reserve the corporation’s name. Then, owners can conduct an online search to determine if the chosen name is available.
Requirement 3. Named Directors
Delaware corporations are required to have at least one director. The selected director can have residency or citizenship anywhere globally and is not for public disclosure. This level of privacy is desirable to some companies and business leaders.
Delaware Corporation Tax
Delaware corporations may elect their tax status but default to “C corp” status if none are selected. As a result, C-corporations face double taxation, which is the primary disadvantage of C corporations. You could also register as an S corp, a pass-through entity.
State Taxes Not Required
Delaware has no sales tax, and it makes no difference whether a business has a physical presence in the state or not. Additionally, there are no state corporate income taxes on the services and goods provided by non-resident corporations. These tax advantages lend to Delaware being a tax shelter for wise investors and business owners.
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