Delaware is known as one of the three incorporation-friendly states, the other two being Nevada and Wyoming. More than 60% of Fortune 500 companies are incorporated in Delaware thanks to Delaware’s excellent body of corporate law, spanning 110 years, regarding such matters as management, shareholder issues and mergers and acquisitions.
To learn more about specific advantages of incorporation in Delaware please consult our article Advantages of Incorporating in Delaware.
It is safe to assume that vast majority of companies registered in Delaware have no physical connection to the state whatsoever. Many technology companies, as well as companies owned by foreigners, register companies in Delaware in order to enjoy from all the benefits offered by Delaware corporate laws. In other words, if your company is aiming to get funded by angel investors, raise venture capital, and/or grow big to qualify for IPO, you might want to consider registering a Delaware Corporation.
With that being said, owning a Delaware company is not the cheapest option: Franchise Tax for LLC is $250 a year, and corporations pay their annual franchise tax based on a complex formula with the amount of tax ranging from $75 to $180,000 (!) a year.
Then there is a question of nexus – if your business is physically located in another state, and you think that by registering it in Delaware you can escape registration in your state (for example, notoriously expensive California), we have to disappoint you. Even though your business will be organized under the Delaware law, you will still have to foreign qualify it in your state, which in other words means you will have to maintain two entities instead of one.
What if your business has no physical presence in the U.S. (for example you run it from abroad)? Again, Delaware is not a bad choice, but unless you plan to obtain serious investments you might want to consider some cheaper alternatives (such as Wyoming).
If you decided to open a new business that will be based in Delaware you can choose from several options:
1. Sole Proprietorship: Sole owners of Delaware-based businesses could opt for sole proprietorship as the easiest form of business organization. Not the most recommended, given the liability a sole proprietor assumes as a result of owning a business. No registration with Delaware Secretary of State is necessary, but it is recommended to register a DBA (Doing Business As) name, and if you plan to hire employees then also obtain an EIN.
2. Single Member LLC: Limited liability company, as the name suggests, is an entity that allows its owners to limit the liability of the business to the entity itself, shielding the owners’ personal assets. This type of entity is recommended for most small businesses.
By default your LLC will be taxed as “disregarded entity”, meaning you will file your LLC tax return as part of your personal tax return. Keep in mind though – LLC is a flexible entity, which means you have the option of electing it to be taxed as S-Corp (assuming you are a U.S. person) or C-Corp. Learn more about LLC here, and about the details of forming LLC in Delaware here.
3. Corporation: You can also form a corporation and be a sole shareholder with 100% of all shares. Corporations have more formalities than LLCs (for example in Delaware you are required to have bylaws and maintain minutes of meetings in corporate records), but provide similar limited liability protection. That’s one of the reasons this entity type is often more suitable for bigger companies, or those who seek major investment.
Corporations can be taxed as S-Corp or C-Corp, with each form of taxation having its pros and cons. Keep in mind, you can elect your corporation to be S-Corp only if you, as the sole shareholder, are a U.S. person.
1. General Partnership: Like sole proprietorship, this entity type does not require registration with the Delaware Secretary of State, but it also does not protect the owners from business liability, and therefore is usually not recommended. A General Partnership needs to register a DBA (Doing Business As) name, and obtain an EIN.
2. Multiple Member LLC: like Single Member LLC for sole owner, Multiple Member LLC is often the entity of choice for small and new businesses with more than one partner.
3. Corporation: Since corporation can have many shareholders, and transfering ownership is relatively easy (though share transfer) corporation might be a good choice of entity for business with partners.
Keep in mind though – S Corporations are limited to 100 shareholders who must be physical U.S. persons. That means corporations owned (partially or fully) by non-U.S. persons or legal entities, cannot be elected as S-Corp, and therefore subject to double taxation of an C-Corp. In cases like that it would be recommended to consider choosing LLC instead.
4. Limited Partnerships: Limited partnerships come in different forms, depending on the state (LP, LLP, LLLP). Though Limited Partnerships have their own purpose and place, for most cases we believe an LLC would serve its owners well enough, therefore at this point we do not cover Limited Partnerships.
An existing company registered in another state or country (called “foreign corporation”, “foreign LLC”, etc) looking to conduct business in Delaware might be required to foreign qualify in Delaware. This rule typically applies to companies looking to open a physical branch in Delaware, lease an office or warehouse, hire employees, etc.
Companies registered in Delaware enjoy from a wide spectrum of services provided by the Delaware Secretary of State . Such services include but not limited to:
Our company specializes in working with state government agencies such as Delaware Secretary of State in order to make your business registration and maintenance easier and smoother. We invite you to browse our website to learn more about our services and prices – and never hesitate to contact us via via phone, chat, or email if you have any questions.
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