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This article has been written by Mayank Jain, pursuing a Diploma in US Contract Drafting and ParalegalStudies from LawSikho.

Introduction

Delaware is one of the states of the U.S state situated in the Mid-Atlantic region. Delaware has their general assembly which consists of 41 members in the House of Representatives and 21 members in the Senate. Its constitution was established by Delaware’s Judicial Branch as follows: Delaware Supreme Court (the highest court of Delaware), Delaware Superior Court (Delaware’s trial court of general jurisdiction), Delaware Court of Chancery (handle primarily in corporate disputes), Family Court (deals domestic and custody matters) and Delaware Court of Common Pleas (jurisdiction over a limited class of civil and criminal matters). In this article, we are going to discuss why Delaware is the best state to incorporate businesses, why many companies choose Delaware as a state to incorporate their business, and what factors should be considered before any business incorporation in the state.

Delaware Court of Chancery

The oldest Business Court of America is the Delaware Court of Chancery. Delaware Court of Chancery’s Judgement or order is based upon the judges not on juries, as there is no jury trial in Delaware Court of Chancery, which helps companies with a speedy trial.

What is the role of the Delaware Court of Chancery?

The Court of Chancery has its jurisdiction over all equity-related matters. This tribunal’s litigation focuses on corporate concerns, trusts, estates, and other fiduciary matters, as well as disputes over land purchases and title to real estate, as well as commercial and contractual matters.

Why incorporate in Delaware?

Delaware has a very unique court. Delaware’s Court of Chancery is found to be the most respectful business court in the nation. Many LLCs and Corporations incorporate due to fair decisions of Delaware’s Court and expert judges of Chancery Court (appointed by the Governor) in business as well as corporate law. Delaware’s Court has also a good no. of case laws that almost covered all business and corporate laws: which assist upcoming business and corporate matters. Businesses choose Delaware for incorporation because the Chancery Court’s fair decisions are predictable, as there is no jury trial in Delaware’s Court. This is the reason why Delaware is occupied with incorporations of more than 65 percent of all Fortune 500 companies and more than half of all U.S. publicly traded companies.

Why is Delaware best suited to incorporate businesses?    

  1. The good reputation of Delaware’s Court: Delaware’s Court is the oldest business court of America with specialized knowledge and experience of corporate issues. Judges and attorneys of Delaware’s Court have a lot of expert knowledge of corporate complex issues, which help and protect corporations and LLCs from unfair decisions and lengthy court proceedings.  
  1. Flexibility for the structuring of a corporation: structure of the corporation is not rigid as in other states, Delaware’s corporate law for the corporation and board members are very flexible and liberal, as it allows one person to be the only director, shareholder, and officer of a corporation and also allow one person to hold all positions.
  1. Geographical: Delaware does not restrict shareholders, directors, and officers to be residents of Delaware to incorporate corporations and LLCs.  
  1. Higher Privacy: Delaware’s law allows corporations not to disclose officers’ and directors’ names and addresses on the formation documents and make them confidential. It increases more privacy to corporations than other states.
  1. Cost for Incorporation: Delaware comparatively affordable to incorporate corporations and LLCs. If we compare Delaware with other states then Delaware is one of the cheapest Countries in the Word for incorporation. 
  1. Raising Capital: it is easy to raise capital as a corporation of Delaware because many venture capitalists, angel investors, and other investors are already attracted by Delaware’s corporation and investors also preferred to invest in Delaware because of the enjoyment of incomparable tax savings.
  1. Tax Advantages: Delaware’s law gave a lot of reliefs to Delaware’s corporations and their shareholders in taxes, like no income tax on businesses that are established in Delaware but do not conduct their business in Delaware.

Drawbacks of incorporation

As we see there are so many benefits of incorporating a business in Delaware, but mostly these benefits are more applicable and beneficial for large corporations and small corporations may not be able to utilize many of the above-stated benefits of incorporation. Anything that has benefits might also have drawbacks, setting up a business in Delaware also has its own drawbacks. 

Most of these businesses are actually not operating from Delaware but are operating from the other states which lead to the imposition of the annual franchise tax in both these states. That means, the company is paying double annual franchise tax for conducting business in one state and corporations need to follow the necessary requirements of these states.       

Factors that should be considered before incorporation

Many factors (including state’s tax structure, available workforce, available skilled or required workforce, family consideration) are involved while choosing the area to incorporate business. The owner oopts for that area that has higher flexibility, is business-friendly, and has an opportunity to grow. So, we will further discuss the main factors that should be considered:

  1. Business Friendly: It is the most important factor that needs to be considered, that a state’s laws should be in favour of businesses and have a liberal policy for the corporation and not be rigid.
  1. Tax Benefits: Every business wants to generate more profits and tax is a major cost for every business which they want to reduce, most of the states impose heavy taxes on corporations due to which corporations do not earn as they want.
  1. Privacy: Privacy is also the biggest issue for the corporation, as corporation data and details are very confidential and may also affect their business, so every corporation wants to protect their details as much as they can. More privacy is beneficial for the incorporation.  
  1. Target market and viability: make sure that your product or services have enough market and the state has your target market to generate revenue at least for sustainability and growth of the business.
  1. Legal Structure: Legal structure refers to the type of business that a person wants to incorporate, state of Delaware offers different types of legal business structures i.e., C corporation, S corporation, LLC (Limited Liability Company), Partnerships, Not for Profit Corporation and Foreign corporation. You should choose the best legal structure that satisfies your business and help you to attain more benefits for the same to obtain legal advice from a business attorney.

How to Incorporate your business in Delaware

Choose a Corporate Name

choosing a name that shows your business position, product, and services. The name should be unique and unregistered under state and federal law. You can register your corporate name under Delaware state law or federal law, in Delaware state law your corporate name is secured only or within Delaware state but if you registered your corporate name under federal law then your corporate name is secured throughout the U.S.  

File a Certificate of Incorporation with the State of Delaware:

Corporations in Delaware are formed by filing a Certificate of Incorporation with the Delaware Division of Corporations. On the Division of Corporations’ website, you can get a blank form.

  1.  Fill out the Delaware Certificate of Incorporation with the following information:
    1. The Delaware corporation’s name
    2. Registered agent and registered office address in Delaware 
    3. The number of shares authorized and the par value per share (a par value is optional).
    4. The incorporator’s name and mailing address 
    5. Incorporator’s name, date of incorporation, and signature 
    6. Fee for filing
  2. Submit the completed Certificate of Incorporation to the Delaware Division of Corporations online or by mail,
  3. The Certificate of Incorporation will be submitted online on the Division of Corporations’ website or through mail to the Delaware corporation. A Delaware corporation charges $89 for filling. The mailed filings process may take weeks, while the online filings process takes 1-3 days. However, a $50 expedite fee is charged by Delaware if the cooperation is needed the same day. 

Appoint a Registered Agent

  • It is mandatory for every business entity to have a Registered Agent in the State of Delaware.
  • Requirements for Registered Agent as per Delaware laws: 
  • An individual resident of the State of Delaware or business entity in the State of Delaware.
  • Must have a physical address in the State of Delaware.
  • The business may in itself act as a registered agent if the business has a physical address or is located in Delaware state.

Prepare Corporate Bylaws

Bylaws are important internal corporate documents.  Bylaws present rules for managing a corporation, it is not legally necessary to file and maintain corporate bylaws, but suggested having corporate bylaws as it benefits corporations to obtain loans and create more authenticity in front of creditors, IRS, and other institutions. 

Appoint Directors and Hold a Board Meeting

Initial directors are those directors who will serve on the board until the 1st annual meeting of shareholders or until elected board members by shareholders, initial directors are appointed by the incorporators of the corporation. Incorporators also have to file and sign an “Incorporators’ Statement” reporting the names and addresses of the initial directors.

The corporation’s board of directors meeting shall be held at the place, where directors can authorise corporate officers, bylaws, select a corporate bank, issuance of shares of stock, and adopt an official stock certificate form and corporate seal. Incorporators or any director have to prepare corporate minutes in which directors’ actions shall be recorded.       

Issue Stock

Issue stock to shareholders against capital contribution, capital contribution can be in terms of cash, kind, or both. It is a must to maintain a corporation’s stock transfer ledger, where each shareholder’s name and contact details should be mentioned. 

In the corporation, the share of stock is allocated as security under Delaware state laws and federal laws, Title 8 Chapter 1 Subtitle 6 section 201. and section 202. Regulates the transfer of stocks. Securities act 1933 is a federal law that regulates the transfer of stocks throughout the U.S. and SEC (Securities and Exchange Commission) is a federal regulatory body of securities.      

File an Annual Report and Pay Franchise Tax

It is mandatory to file an annual report and pay franchise tax for all corporations that are incorporated in Delaware. Delaware Division of Corporation is an authority, which receives annual reports and taxes. The last date for the corporation to submit an annual report and pay taxes is March 1st of every year, and for the foreign corporation is June 30th of every year. 

Obtain an Employer Identification Number (EIN)

Every Corporation and organisation requires EIN (Employer Identification Number) to file tax returns and to pay employee’s salaries. EIN is also required or necessary to open a bank account. It is a unique nine-digit number issued by the IRS (Internal Revenue Service) to businesses to recognize or supervise them for tax purposes. EIN is also named FTIN (Federal Tax Identification Number).  You can obtain or apply for EIN without filing fees at the IRS Website. 

new legal draft

You may pay your taxes, file your annual report, search for a business entity, validate a certificate, check the availability of entity names, get your corporate forms and fee schedule virtually at the Delaware state website: https://corp.delaware.gov/ without visiting any office physically. 

Delaware corporation and business entity laws 

Title 8 Chapter 1 

  1. Section 101. Deals with how a corporation should be formed: any person, partnership, association, or corporation singly or jointly, with or without state residence, domicile, or state incorporation, may incorporate by filing with the Division of Corporation in the Department of State.
  2. Section 102. Deals with the content of Certificate of Incorporation; the Certificate of Incorporation shall be containing the following points:

Name of the Corporation that shall contain any of the words from following: “company,” “association,” “club,” “corporation,” “fund,” “incorporated,” “foundation,” “society,” “institute,” “syndicate,” “union,” or “limited;

Total assets as defined under section 503(i), only in the case of where such corporation executes, acknowledges, and files with the Secretary of the state.

Address of the Corporation’s registered office in this state accordance with section 131(c), and the name of its registered agent;

Nature and purposes of the business, the purpose of the corporation shall be lawful act or activity. 

Total number of shares of stock which the corporation shall have authority to issue and the par value of each share, or statement that all such shares are to be without par value (in the case of where a corporation is to be authorised to issue only 1 class of stock), Total number of shares of all classes of stock which the corporation shall have the authority to issue and the number of shares of each class and shall specify each class the shares of which are to be without par value and each class of the shares of which are to have par value and the par value of the shares of each class (in case of where a corporation is to be authorised to issue more than 1 class of stock).

Statement of Designations, powers, preferences, rights, qualifications, and limitations or restrictions which are permitted under section 151 of Title 8 in respect of class or classes of stock of the corporation. 

Incorporator or incorporators’ name and mailing address

Name and mailing address of a person who serves as a director until the first annual meeting of stockholders or until their successors are elected and qualify (in the case of where incorporators’ power terminates upon the filing of the Certificate of Incorporation).        

Section 103. Deals with execution, acknowledgement, and filing of the certificate of incorporation, Section 103(1) the Certificate of Incorporation shall be signed by incorporators if initial directors were not named.

  1. Partnership is regulated under Title 6 Chapter15; Delaware Revised Uniform Partnership Act,
  1. Limited Partnership is regulated under Title 6 Chapter 17
  1. Limited Liability Company is regulated under Title 6 Chapter 18; Limited Liability Company Act,
  1. Non-profit association is regulated under Title 6 Subtitle II Chapter 19; Delaware Uniform Corporate Non-profit Association Act.     

Delaware corporation costs and fees

  1. Corporation filing fee — The minimum fee is $89, but depending on how much stock is authorized and/or the stock’s par value, you may be charged more.
  2. Stock fees – If you authorize more than 1500 shares with no par value, your filing charge will increase. The filing fee will increase by $0.01 per share if you authorize more than 1500 but not more than 20,000 shares. The filing fee will increase by $0.005 per share if you authorize more than 20,000 but less than 2 million shares. The filing fee will be calculated at $0.004 per share if you authorize more than 2 million shares.
  1. Annual report fees– The cost of an annual report in Delaware is $50 for domestic firms and a $125 report fee is charged from foreign firms, incorporated in Delaware.
  1. Franchise Tax – Filed in concert with your annual report is Delaware’s Franchise Tax. This tax has a $175 minimum payment and is payable every year on March 1. Authorized Shares and Par Value Capital are the two ways of calculating this tax. The minimal tax under the par value capital approach is $350.
  1. Penalty– $100 is imposed as a penalty for not filing or filing an incomplete annual report on or before the given date i.e., March 1st of every year. The penalty for a foreign corporation is $125 for not filing or filing an incomplete annual report on or before the given date i.e., June 30th. 1.5% percent interest per month on unpaid tax balance imposed as a penalty.

Conclusion

Delaware found the best state to incorporate business from other states of the US and the world because of their business-friendly laws which help businesses to earn more profits and help businesses to grow more. Apart from statutes, Delaware found the most respectful business court which pronounces fair decisions and Delaware’s Court has expert knowledge and experience in business and corporate law. Delaware as a state provides so many benefits to businesses to incorporate their business in Delaware which we already discussed in this article and if you compare Delaware with other states, you can find Delaware is the best state to incorporate businesses. Many companies are already incorporated in Delaware and many start-ups are incorporated in Delaware every day.  

References

  1. https://www.delawareinc.com/ 
  2. https://www.wolterskluwer.com/en/expert-insights/how-to-incorporate-a-business-in-delaware 
  3. https://delaware.gov/ 
  4. https://corp.delaware.gov/ 

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