Incorporating in Delaware: Benefits, Steps, and Considerations
This is the most famous state in the United States for forming an LLC or incorporating a business by a foreign person. One of the most important benefits of incorporating in Delaware is that the ease of doing business, maintaining a foreign address, and the government and legislative support for the business. Most holding companies do not pay income tax in Delaware on their passive income. You do not need to be a resident of Delaware. The process of incorporation is easy, and also your privacy is protected.
I may advise my clients to consider incorporating in the state of Delaware for several reasons. Here are some of the main considerations:
However, it is important to note that incorporating in Delaware may not be the best choice for every business. The decision to incorporate should be based on a variety of factors, including the type of business, its location, and its long-term goals.
As a cross-border tax consultant, I would work closely with my client to evaluate their specific needs and advise them on the most appropriate legal structure for their business. I would also help them navigate the complex tax laws and regulations associated with incorporation, to ensure that they are fully compliant with all applicable federal and state tax laws.
I have tried to summarize the steps for you that you may need to consider when incorporating in Delaware:
You should choose a company name that includes any of the following words: Company, corporation, limited, association, foundation, incorporated, institute, society, syndicate, union, club, and fund. These words can be used as it or in abbreviated forms and in different languages, as long as the Roman transcript is used and the actual meaning is not altered.
Despite having the above compulsory words, the company’s name should be unique. The factor of homogeneity of a company’s names must be considered while selecting a new company name. The new company name must not be identical to any of the already existing firms on the Delaware Secretary of State. You can get a list of already enlisted firms on the Delaware Secretary of State from the official website of the State of Delaware. To book a name online you can visit the Delaware Division of Corporations website.
The new corporation is legally born when a Certificate of Incorporation – Stock Corporation is registered with the Delaware Secretary of State. The registration can be made either online or through postal mail. But attaching a Filing Cover Memo is mandatory for both methods. Following are the registration charges based on size and type of company stock:
A detailed Corporate Fee Schedule is available on the official website of the State of Delaware. Given are the standard thresholds, the fee is increased based on the additional number of stocks at par or no par value.
The Certificate of Incorporation must contain the following company information: Company name, purpose, name of the owner, email address of the state, address of registered office, name of agent providing service at the given address, and a number of the company’s authorized shares to issue.
There is a non-mandatory requirement in the article of incorporation of the Delaware Secretary of State for the company to mention the par value of corporate shares. In case the company issues shares at no par value, then this requirement can be crossed out, and ‘no par value’ can be mentioned.
The certificate of incorporation form comprises an optional ‘director’s liability provision’ that provides protection to directors against personal liability in case of breaches of the duty of care.
It is important for every firm in Delaware to hire an agent for the service of legal mailing. The agent agrees to service of process before the proper designation of the company. As a requirement of this service, the agent agrees to accept all legal documents on the company’s behalf in case it gets sued.
The agent must be a legal entity resident of Delaware and entitled to do business in Delaware. The agent must maintain a physical address in Delaware. It is not necessary to hire an agent if the company itself is positioned in Delaware because it can act as its own registered agent.
Bylaws are a document that takes in the policies for internal corporate affairs and basic company operations. It is not a legal obligation on companies of the state of Delaware to formulate a bylaws document, but it is useful for the firm in the following ways:
A tip for companies is to maintain all legal and important corporate documents like meeting minutes and bylaws in a separate records book.
The Incorporator must assign the initial corporate directors who will work on the board till the first meeting of shareholders. This personnel are merely an acting board of directors. The shareholders will elect the permanent board of directors for the corporation in that meeting, after which the acting personnel’s authority will be handed over to the elected directors.
The Incorporator’s Statement is a document that must be filled and signed by the Incorporator. It includes the names and addresses of the initial directors. A copy of the Incorporator’s statement must also be attached to the company records book. It is not needed to report this document to the state of Delaware.
Important matters of the company are discussed and decided in the first meeting of the elected board of directors. These matters include employing corporate officers, creating bylaws, choosing a company bank, deciding on the issuance of company stock, determining the company’s fiscal year, and acquiring an official stock certificate form and corporate seal.
All discussions and activities of the board of directors must be noted in the corporate minutes by either any of the directors or incorporators. Affirmation of the prepared document by the board of directors is also important.
The shareholders must be issued with stocks according to their capital investment of cash, property, and/or services. Small corporations normally issue paper stock certificates. Whenever a shareholder buys a company stock, his/her name along with contact information is recorded in the stock transfer ledger.
Delaware offers corporations two choices; issuing stock at some par value or at no par value. Par value is a fixed specific amount below which the stock cannot be sold, regardless of its actual value. This legal concept has been used for ages in some states.
A portion of stock in any corporation is classified as insurance under state and federal securities laws that regulate the trade of corporate stock. However, “private offerings”, non-advertised sales to limited people (usually 35 or fewer), are exempted by federal law.
The state of Delaware does not have extensive procedure requirements for unadvertised share sales to accredited investors. However, the only condition is that shares are attained for the purpose of investment only. The accredited investors comprise corporate officers, directors, and affluent investors (who have assets valued at least $1 million or earn $200,000 s per year if single or $300,000 if married). There is no requirement for the company to register unadvertised shares sold to 35 or less uncredited shareholders. However, a Limited Offering Exempt (LOE) document needs to be filed within fifteen days of the initial sale with the Investor Protection Unit of the Delaware Department of Justice. No additional fees are charged for this process. Additional information is available on the website of the Protection Unit section of the Delaware Department of Justice.
It is mandatory for all organizations registered with the state of Delaware to submit annual reports and pay a franchise tax to the Delaware Division of Corporations by the start of March every year.
Foreign Corporations can submit two months later, in June of each year.
The annual report filing fee for Delaware state corporations is $50, and it is $125 for foreign companies, excluding franchise tax.
The franchise tax ranges from $175 to $200,000. Corporations that owe $5,000 or more pay estimated taxes in quarterly instalments, that is, 40% due June 1; 20% due by September 1; 20% due by December 1; and the remainder due March 1. Corporations may confer the Delaware Franchise Tax Calculator for further details or to clear any ambiguity.
Corporations that fail to meet the above-mentioned requirements will be charged a penalty of $100. Moreover, an interest of 1.5% of the unpaid tax balance is charged to the company per month. Foreign organizations are penalized by an amount of $125 if the annual report is not submitted.
The annual report must be submitted online. All Delaware registered agents are sent a notification in December of each year of the due Annual Report and Franchise Taxes.
To hire new employees in the firm, an Employee Identification Number (EIN) is to be obtained from the IRS website by submitting an online application.
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters.
Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.