How to Incorporate in Delaware (May 2024 Update)

With over 50% of all publicly traded companies and 64% of the Fortune 500 incorporated within its borders, Delaware has earned its nickname as the “Corporate Capital of the World.” But what exactly makes the second smallest state such an appealing place for businesses to call home? Read on to find out why you should consider incorporating in Delaware, the step-by-step process to do so, important requirements to remain compliant, and whether forming a corporation in Delaware makes sense for your small business.

Why Delaware? The Benefits of Incorporating in the First State

There are several key reasons why over 1 million business entities have chosen Delaware as their legal home.

Tax Benefits

• No corporate income tax for companies not conducting business within the state. This applies even if the corporation is incorporated in Delaware. Companies pay only a modest franchise tax instead.
• No state sales tax, reducing operational costs for corporations who do decide operate within Delaware.
• No personal property tax, investment income tax, or inheritance tax at the state level.

In sum, Delaware offers corporations legitimate ways to significantly reduce tax liability.

Privacy Protections

• Only the corporation’s registered agent information is a public record. The registered agent accepts legal documents on the company’s behalf.
• Officers, directors, and shareholders do not have to be publicly revealed or even located within the state. This provides extra privacy.

Expedient & Simple Business Formation

• 1-hour or same day filing of incorporation paperwork and certificates is common.
• Lean regulatory bureaucracy and staff expertise in corporate formations makes the filing process straightforward.
• Corporations enjoy flexibility in governance structures. Just one person can serve in multiple roles like officer, director, and shareholder all at once.

Specialized Corporation Law Court

• Corporate law-focused judges rather than juries render decisions.
• No punitive damages awards speeds case resolution.
• Well-established legal precedents exist, especially for alternative dispute resolution.

The 8 Step Process to Form a Delaware Corporation

While consulting with business lawyers is highly recommended, the state aims to make DIY incorporation achievable for entrepreneurs. Below are the basics of what’s entailed.

Step 1. Choose a Business Name

Your corporation’s legal name must include a business designator like "Company" or one that connotes incorporation status. It cannot match another entity’s name. Delaware lets you reserve a name online for 120 days for $75.

Step 2. Appoint a Delaware Registered Agent

All corporations must designate a registered agent based in Delaware that can accept legal service documents if your business gets sued. An individual or business entity can fill this role.

Step 3. File a Certificate of Incorporation

This legal document officially forms your corporation. It must list details like your entity’s name, registered agent, authorized shares, business purpose, and an incorporator’s signature. Filings fees start at $89.

Step 4. Adopt Corporate Bylaws

Bylaws outline internal rules and procedures for operating your company. While not mandated, adopting bylaws proves to regulators and lenders that you’re running a proper corporation.

Step 5. Hold First Board of Directors Meeting

The incorporator initially appoints director(s) to oversee high-level corporate affairs. Directors then hold an organizational meeting to appoint officers, select a bank, authorize stock, set fiscal year, and adopt a corporate seal.

Step 6. Issue Stock Certificates to Shareholders

Stocks formally document shareholder ownership interests. Directors authorize stock certificate issuance per entity bylaws and governance procedures. Delaware lets you easily issue stock without par value if desired.

Step 7. Stay Compliant After Forming

Newly incorporated entities must file an annual report and pay franchise taxes to stay in good standing. The minimum tax is $175 per year. Standard due date is March 1st.

Step 8. Obtain an Employer Identification Number (EIN)

An EIN is required for federal tax purposes and other governmental reporting. Apply online anytime on the IRS website.

Ongoing Franchise Tax & Annual Report Filings

To maintain your incorporation status, Delaware requires corporations to file an annual report and pay franchise taxes. Requirements include:

• $50 annual report filing fee.
• Minimum $175 franchise tax. Maximum owed is $200,000.
• Quarterly estimated pre-pay for taxes above $5,000.
• Annual deadline is March 1st.
• Late fees of $200 plus interest penalties.

Is Forming a Delaware Corporation Right for Your Small Business?

With the business-friendly tax incentives and helpful regulatory landscape, forming a corporation in Delaware holds lots of appeal on the surface. But business structure decisions also need to make practical sense for your company’s situation. There are a few downsides to weigh as well before incorporating in Delaware.

Higher Compliance Requirements

For small business owners looking to minimize legal work, Delaware adds regulatory burdens that incorporating locally may avoid. You must register your corporation in your home state too while meeting both jurisdictions’ annual reporting rules. This doubles the administrative workload and state fees owed.

Minimal Tax Benefits

Unless your corporation earns significant revenues, the tax advantages may be non-existent or negligible after paying Delaware franchise taxes and home state added costs. Plus, states levy taxes on companies “doing business” in them, even if incorporated out of state. Consult a tax advisor to run the numbers.

Added Representation Expenses

If legal disputes arise, you must hire a Delaware-barred attorney and travel there to appear in-person for litigation events. Similarly, a locally based registered agent familiar with Delaware laws is a must. These advisors impose fees that incorporating in your home state avoids.

The Outcome

Many companies see bottom line benefits from Delaware’s business-friendly legal and tax structure. For most small businesses though, the extra compliance burdens and legal/tax representation costs fail to justify expected tax savings. Carefully determine if affiliating with Delaware provides advantages that significantly outweigh staying solely incorporated in your home state. Either way, forming a corporation shields your personal assets and opens up fundraising opportunities worth celebrating!