Why companies incorporate in Delaware often comes down to tax benefits, investor confidence, corporate courts, and privacy rules. This article covers the main costs, drawbacks, filing steps, and business factors tied to Delaware incorporation.
By Brad Nakase, Attorney
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Businesses often select to incorporate in Delaware. And with good cause. The state has become pro-corporate for a variety of reasons. Although there are undoubtedly benefits to establishing a business in Delaware, there exist drawbacks as well.
There are advantages to incorporating in Delaware. However, those advantages are primarily available to large firms with substantial financial resources. It is not always a good idea for small businesses to incorporate in Delaware. In Delaware, creating and maintaining a corporation can be expensive. This is particularly true for startups or small firms. It is essential for a company to assess the benefits & drawbacks and the status of their business before incorporating in Delaware.
A business owner would undoubtedly not be the only one interested in establishing a corporation in Delaware. Almost 70 percent of the Fortune 500 businesses are incorporated in Delaware. This is according to the Delaware Division of Corporations. A further 1.5 million businesses have registered as corporations. What, therefore, makes Delaware unique? A deeper look at why companies incorporate in Delaware reveals both legal and financial benefits.
Delaware’s goal is to be a state that welcomes corporations. The state provides a number of benefits to businesses, making incorporation there look like the greatest option for entrepreneurs. The following are some of these benefits.
Although it is obvious that incorporating in Delaware has benefits, it is important to remember that there are drawbacks as well. One thing to remember is that incorporating in one’s home state is almost always more financially advantageous.
In Delaware, forming a corporation is neither exceptionally costly nor complex.
1. Select your corporate name: Your name must contain one of the following terms: association, corporation, company, fund, club, foundation, incorporated, society, institute, union, limited, or syndicate. It must also be distinct and not confusingly similar to another company.
2. Select the sort of business entity you want to be: Choose between a statutory trust, limited partnership, C Corp, S Corp, or limited liability corporation (LLC). For further details, see our article.
3. Choose a registered agent: Each Delaware Corporation is required to choose an in-state “agent for serving of process.” In the event that a corporation is sued, this person or organization may be able to accept legal documents on the company’s behalf.
4. Submit a certificate of incorporation: Once you submit a Certificate of Incorporation—Stock Certificate in the office of the Delaware Secretary of State, your corporation becomes a legal entity.
5. Obtain a certificate of good standing: A certified copy of your new company filing or a good standing certificate is required by many banking institutions to open a corporate account. One can be ordered concurrently with the filing of the Certificate of Incorporation.
6. Submit articles of incorporation: They can be submitted by mail or online and need to contain the name of the registered agent, the corporation’s name, the office’s physical address, and a Filing Cover Memo. Additionally, you must include the mailing address and name of the incorporator, the number of stocks the corporation is permitted to issue, and the objective of the corporation.
7. Create corporate bylaws: Although Delaware does not mandate them, an internal document outlining the fundamental guidelines for running your business can demonstrate its legitimacy to banks, investors, the IRS, and other stakeholders.
8. Select directors and call board meetings: The “incorporator,” who signed the articles, selects the first corporate directors. During the initial board gathering, the directors ought to:
9. Issue stock: You can issue shares in exchange for capital expenditures of money, real estate, services, or all three. Stockholders are listed in the company’s stock transfer ledger, and these are typically issued as paper certificates.
10. Pay franchise tax and submit an annual report: You must pay a franchise tax and submit an annual report by 1st March if you are a Delaware corporation.
11. Get an EIN: You must fill out an application on the IRS website to be able to obtain an Employer Identification Number (EIN).
Final Words
Startup founders often explore why companies incorporate in Delaware during early planning stages. A business still has the option to transfer to Delaware at a later time if needed if it decides to incorporate in a different state. Switching to Delaware later on can be expensive in terms of money (such as extra paperwork & legal expenses) and time.
Because of this, it is often advantageous to incorporate in Delaware from the beginning so as to avoid having to explain to investors why this wasn’t done initially, as well as to avoid the expense and time of moving to Delaware during what’s already a stressful time when looking for extra funding to expand the company or just keep it afloat.
Although incorporating in another state does not prevent a company from getting outside funding, Delaware can facilitate the process. As previously mentioned, Delaware can be more costly than just incorporating in the startup’s home state, but in many situations, it helps businesses both legally and administratively.
All things considered, however, one of the main reasons why so many businesses finally choose to incorporate in Delaware is that investors nationwide are familiar with Delaware law. As is often the case, communication is essential. It may be extremely beneficial for the teams of the investor and the firm to operate from the same documents and legal backdrop.
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