Incorporation in Delaware refers to the gradual process of establishing a legal entity known as a corporation under the laws and rules of the state of Delaware. Delaware is known for having a business-friendly legal and regulatory environment. Hence, many companies, including large corporations, choose to incorporate there. This blog delves deeper into the nuances of incorporating in Delaware.
Benefits of Incorporation in Delaware
Listed below are the primary reasons for incorporating in Delaware:
- Business-Friendly Legal System: The legal environment in Delaware is conducive to corporate law. The state has a specialized Court of Chancery focusing on business disputes and providing expertise and predictability in resolving corporate matters. The court's decisions and precedents offer stability and clarity for businesses.
- Flexibility in Corporate Structuring: Delaware provides high flexibility in corporate structuring. The state's General Corporation Law allows corporations to customize their governance and operational procedures to suit their needs. This flexibility is particularly beneficial for larger companies with complex ownership structures or those seeking to attract outside investors.
- Strong Shareholder Protection: Delaware offers robust legal protections for shareholders. The state's corporate laws provide clear guidelines on directors' fiduciary duties, which helps ensure fair treatment of shareholders' interests. This protection helps attract investors and provides a stable environment for corporate governance.
- Privacy and Anonymity: Delaware allows corporations to maintain a higher level of privacy and anonymity. The details of the shareholders, including their names and addresses, are not mandatorily disclosed in the formation documents and hence, provide an added degree of confidentiality. This feature can be advantageous for businesses that value privacy or wish to protect the identities of their owners.
- Tax Advantages: It does not have a state corporate tax for incorporated companies operating outside the state. This can be advantageous for businesses operating in multiple states or internationally, as they can minimize their overall tax burden.
- Access to a Skilled Workforce and Resources: Delaware hosts a skilled and educated workforce and a close network to major metropolitan areas such as Philadelphia and New York City. Additionally, the state offers various resources and support for businesses, including networking opportunities, access to funding, and business development programs.
- Established Corporate Norms: Delaware's popularity as a corporate haven means that many legal professionals and business advisors are familiar with Delaware corporate laws and practices. This can make finding experienced legal counsel, accountants, and other professionals well-versed in Delaware corporate matters easier.
Disadvantages of Incorporation in Delaware
Let us look at the challenges of incorporating a business in Delaware:
- No Home State Tax Benefits: Small business tax savings are unimportant when incorporated in Delaware. While Delaware does not tax its incorporated companies that don't conduct business in Delaware, the company’s home state will still apply taxes. Hence, avoiding taxation completely is impossible.
- High Filing Expenses: Filing in Delaware is more expensive compared to other states. The filing fees in Delaware are considerably higher than in other jurisdictions.
- Double Franchise Taxes: Franchise tax is generally minimal for small businesses but increases as the number of shares and share value of the company grows due to its business expansion in Delaware. Besides, there might also be a mandate on paying franchise tax in one's home state.
- Adherence to Two State Mandates: Meeting the home state's requirements is necessary. Despite incorporating in Delaware, the concerned business must still fulfill its home state's filing and licensing requirements to conduct business there. Filing annual reports in Delaware and the home state results in additional work and expenses.
- Legal Disputes: Legal disputes require travel and a Delaware attorney. If any legal disputes involving the concerned company arise, they must be handled in the Delaware court. This implies the physical presence of the person to deal with these disputes and get in touch with a Delaware lawyer who is well versed with the state’s laws in addition to the home state lawyer.
Steps for Company’s Incorporation in Delaware
A company can be incorporated in Delaware by following the steps below.
- Name the Corporation. The name that one selects for their corporation must be distinct from the registered entities to avoid confusion and intellectual property rights disputes. Hence, the availability of the name needs to be checked through the Delaware Division of Corporations website.
- Appoint a Registered Agent. Delaware requires every corporation to have a registered agent who can receive legal and official documents on behalf of the company in the state.
- Get a Certificate of Incorporation. A legal document that serves as a license for creating a company. The certificate includes the company’s name and address, the registered agent's name and address, the number of authorized shares of stock, the names and addresses of the initial directors, the purpose of the corporation, and details regarding any additional provisions or special rights.
- File the Certificate of Incorporation. The document must be filed with the Delaware Division of Corporations, followed by a nominal fee. The filing process can occur in person, via mail, or online. Once filed, the officials will review the document, and if everything is in order, the corporation will be officially registered.
- Obtain an EIN. The Employer Identification Number is obtained to create a bank account for a corporation and a tax filing. It is a federal tax identification number.
- Draft Corporate Bylaws. These bylaws outline the internal rules and procedures for operating the corporation. They typically cover shareholder meetings, director responsibilities, voting rights, and other corporate governance matters. Draft customized bylaws that suit the needs of the corporation.
- Hold an Initial Organizational Meeting. Conduct an initial meeting with the board of directors to adopt the bylaws, elect officers, and handle any other necessary organizational matters. Document the decisions made during this meeting in corporate minutes.
- File an Annual Report Yearly. Delaware requires incorporated businesses to file an annual report and pay franchise taxes by the designated due date each year.
- Maintain Corporate Records. The records of the company’s functions must be accurate and up-to-date. This record includes shareholder information, minutes of the meetings, and financial documents.
- Comply with Applicable Laws. Tax, employment, permit, and license compliance is a key component of maintaining an effective corporation.
Key Terms for Incorporation in Delaware
- Certificate of Incorporation: It includes essential information such as the company's name, the registered agent, the number of authorized shares, and initial directors.
- Registered Agent: An individual or entity designated to receive legal and official documents on behalf of the corporation.
- Authorized Shares: Maximum number of shares a company can issue to its shareholders. This number is specified in the Certificate of Incorporation and can be later changed through amendments.
- Directors: They are appointed to oversee the management and decision-making of the corporation. They can be independent or non-independent. They are responsible for setting corporate policies, making strategic decisions, and overseeing the corporation's affairs.
Final Thoughts on Incorporation in Delaware
With Delaware's business-friendly environment, strong legal system, and established corporate norms, incorporation is a strategic choice for many businesses. The advantages of incorporating in Delaware include flexibility in corporate structuring, strong shareholder protection, privacy and anonymity, tax benefits, access to skilled resources, and the expertise of the Court of Chancery. While incorporating in Delaware might seem like a lucrative option, it is advisable to consult with professionals first. Several elements like size, industry, sector, location, and long-term objectives must be considered.
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