How to Form a Corporation in Delaware
Officially forming your business entity is the first official major step of any organization.
Incorporating a business in Delaware is consistently among the lowest-cost places to do so in America and, if you are considering outside investment, is a prudent place to do so as many investors are familiar (and comfortable) with Delaware. Importantly, you can do so even if you plan to operate in another state, like California (see Point No. 9 below). In addition, Delaware imposes no income tax on either LLCs or corporations, and imposes no tax on capital stock for small companies.
Given these clear bottom-line benefits, as well its recognized pro-business laws, business owners are continuously drawn to Delaware. Here are the basic steps:
Choose a Corporate Name
You can essentially give your corporation a name of whatever you desire. There are just three requirements when doing so:
(1) Your corporation's name must not be similar to other businesses already on file with the Delaware Secretary of State. In order to check this, you should search business names on the Delaware Secretary of State business entity search and can reserve a name online through the Delaware Division of Corporations website.
(2) Your corporation’s name MUST INCLUDE the word “association,” “company,” “corporation,” “club,” “foundation,” “fund,” “incorporated,” “institute,” “society,” “union,” “syndicate,” or “limited” (or an abbreviation of one of these, with or without punctuation). And
(3) Your corporation’s name MUST NOT INCLUDE the word “trust” or “bank”.
Appoint a Registered Agent
Every Delaware corporation must have an agent for service of process in the state. This is an individual or corporation that agrees to accept legal papers on the corporation's behalf if sued. The agent should agree to accept service of process on your corporation's behalf prior to designation. The agent may be (1) an individual Delaware resident, or (2) a business entity authorized to do business in Delaware. The registered agent must have a physical street address in Delaware.
Note that if your corporation is physically located in Delaware, it may act as its own registered agent. There is a list of Delaware Registered Agents on the Delaware Division of Corporations website.
Prepare and File Your Company’s Certificate of Incorporation
Your corporation is legally created by filing a Certificate of Incorporation - Stock Corporation with the Delaware Secretary of State. Articles can be filed online.
The articles must include: the corporation's name; the address of the corporation’s registered office in the state (street, number, city, county, and postal code) and the name of the registered agent for service of process at that address; the number of shares the corporation is authorized to issue and the par value of each of such shares (or a statement that they are to be without par value); its purpose (generally any lawful activity); and the name and mailing address of the incorporator(s).
There are also a number of optional provisions that can be included in a customizable certificate of incorporation that our firm could advise and help you draft. One such common provision is the limitation of personal liability for a director to the corporation or its stockholders for monetary damages for breach of the duty of care.
Prepare Corporate Bylaws
Bylaws are an internal corporate document that set out the basic ground rules for operating your corporation. They are not filed with the state, but simply kept with your corporation’s official books and records. While a corporation is not legally required to have corporate bylaws, you should adopt them because they establish your corporation's operating rules and help show banks, creditors, the IRS, and others that your corporation is legitimate, proper and mature.
Keep your bylaws, meeting minutes, and other important corporate papers in a corporate records book.
Appoint Directors and Hold Initial Board Meeting
The incorporator—the person who signed the Certificate if Incorporation—must appoint the initial corporate directors who will serve on the board until the first annual meeting of shareholders (when the board members who will serve for the next term are elected by the shareholders). The incorporator must fill in an “Incorporator's Statement” showing the names and addresses of the initial directors. The incorporator must sign the statement and place a copy in the corporate records book. The statement need not be filed with the state.
The first meeting of the corporation's board of directors should then be held at which the directors can appoint corporate officers, adopt bylaws, select a corporate bank, authorize the issuance of shares of stock, set the corporation's fiscal year, and adopt an official stock certificate form and corporate seal. The directors’ actions should be recorded in corporate minutes prepared by the incorporator or any of the directors and approved by the board of directors. Additionally, if the corporation will be an S corporation, the directors should approve the election of S corporation status.
Note that directors do not have to be a specific age, have to reside in a specific state, or have their names or addresses listed in the Certificate of Incorporation.
Issue Stock
Issue stock to each shareholder in return for their contributions of cash, property, services, or all three. Small corporations usually issue paper stock certificates, although your bylaws can do away with certificates if you so desire. Enter each shareholder’s name and contact information in the corporation’s stock transfer ledger.
Delaware gives corporations the option of establishing a par value for their stock or issuing no par value shares. Par value is a set amount below which the stock cannot be sold--it has nothing to do with the stock's actual value. It is, however, commonly used.
Be aware: A share of stock in your corporation is classified as a security under state and federal securities laws that regulate the offer and sale of corporate stock. And any such security is required to be registered as such or fall under a federal and state exemption. Luckily, federal law (and many states) have a number of exemptions to requiring registration, one of which is “private offerings”: a non-advertised sale to a limited number of people (generally 35 or fewer), which likely includes the founders. It is, however, a good idea to get legal counsel—and I am not just saying that because I am a lawyer!—as to the propriety any stock that you wish to issue. Even if exempt, there are generally notice requirements that accompany the issue of stock, whether at the federal or state level.
Obtain an EIN
For federal tax purposes, your corporation must obtain a federal employer identification number (EIN). You may obtain an EIN by completing an online application on the IRS website. There is no filing fee. State tax authorities may also have their own requirements on obtaining a tax identification number.
File Annual Report and Pay Franchise Tax
All corporations incorporated in Delaware must file an annual report and pay a franchise tax along with it (consult the Delaware Franchise Tax Calculator for details). The taxes and annual reports must be received by the Delaware Division of Corporations no later than March 1st of each year. The annual report is filed online.
A Notification of Annual Report and Franchise Taxes due is sent to all Delaware registered agents in December of each year.
Operating in Another State?
LLCs and corporations are considered “domestic” only in the state of incorporation—in this case, Delaware. In all other states, they are considered “foreign” companies. Because of this, if you incorporate your business in Delaware, but are conducting business in other states, you may need to “foreign qualify” in those states through a registration process known as foreign qualification.
The foreign qualification process is very similar to that of incorporation, and is usually even easier. States also impose ongoing requirements on foreign-qualified companies, such as annual report filings and fees. So when you incorporate in Delaware and foreign qualify in another state, you will be responsible for the ongoing filings and fees in Delaware and the additional state(s) of qualification.