How to Incorporate a Business Under Delaware Law
A Delaware corporation is a legal entity that stands separate from its owners. Corporations benefit owners by protecting their personal assets from business debts. Creditors and plaintiffs usually cannot reach the personal assets of business owners to satisfy judgments against a corporation. However, corporations are subject to what is sometimes known as “double taxation.” Corporations are taxed when they take in profits, and shareholders pay tax on any dividends or capital gains.
A corporation can be a C corporation or an S corporation. A C corporation is the more traditional of the two, while an S corporation somewhat avoids double taxation by “passing through” its profits to the individual tax returns of its owners. An organization that prioritizes control over “going public” may be structured as a close corporation. A close corporation (or “tightly held” corporation) is usually limited to a small number of shareholders and often restricts how stocks are sold or transferred. Close corporations work well for organizations such as family businesses.
Regardless of how an organization chooses to incorporate, it is important to follow all the steps of incorporation properly. The benefits and protections of the corporate structure, such as protection from liability, may not apply if a business is not properly incorporated.
1. Choosing a Name
An incorporator may name their Delaware corporation almost anything so long as it is distinguishable, does not mislead the public, and includes the word “association,” “company,” “corporation,” “club,” “foundation,” “fund,” “incorporated,” “institute,” “society,” “union,” “syndicate,” “limited,” or an abbreviation of these words. It may alternatively include an approved similar word of a foreign country or jurisdiction. The Department of State may waive this name requirement under certain circumstances.
The corporation’s name also must be distinguishable from all other businesses in the state and must not include words that may mislead the public, such as “bank” or “trust,” without authorization. Delaware will consider the word “bank” if it is used in a way that clearly does not refer to a banking business or mislead the public.
A corporation name may be reserved with the Department of State for a fee. The reservation will last for 120 days. It may be a good idea to also check if the web domain is available for purchase. A corporation operating under a name other than its legal name will need to file a DBA (Doing Business As) with the Prothonotary’s office of the corporation’s county. Finally, a registered name is not a trademark. Trademarks are registered with the U.S. Patent and Trademark Office or a state trademark office.
2. Choosing a Registered Agent
A business’ registered agent receives service of process, government correspondence, and compliance documents on behalf of the business. A registered agent can be an individual or an entity. A corporation physically located in Delaware may serve as its own registered agent. A director or officer may also serve as an agent. Some businesses, especially larger ones, prefer to employ a registered agent service. Regardless, Delaware requires that a registered agent meet the following criteria:
- Is at least 18 years old
- Maintains a physical address in Delaware
- Is available in person during normal business hours
3. Choosing a Share Structure
In order to complete the Certificate of Incorporation, incorporators and directors must choose a share structure. A share structure will include the number of shares that the corporation is allowed to issue (the authorized shares), the total number of shares actually issued to shareholders (the issued shares), and any share classes with defined rights and privileges.
Unlike some states, Delaware does not dictate a par value, meaning a threshold value under which a stock cannot be sold. Instead, incorporators choose whether or not the stock will have a par value in the Certificate of Incorporation.
4. Executing the Certificate of Incorporation
The Certificate of Incorporation is the official document that creates a Delaware corporation. It can be filed online, in person, or by mail with the Delaware Department of State for a filing fee. Delaware’s standard form only provides for a corporation with one share class. A corporation with multiple share classes must draft its own document. A business lawyer may be helpful in this situation.
The Certificate of Incorporation includes:
- The corporate name
- The corporate registered agent’s name and street address
- The number of authorized shares that the corporation is allowed to issue
- The name and mailing address of the incorporator
- The signature of the incorporator
For more information, see: 8 DE Code § 102.
5. Holding an Organizational Meeting
The first meeting with the incorporators and potentially the initial corporate directors (appointed by the incorporators) is used to make key decisions. Attendees of the first organizational meeting will usually:
- Set up a corporate records book to maintain all important records
- Create and approve bylaws
- Select initial directors and officers
- Select a corporate bank
- Set the corporation’s fiscal year
- Execute an Incorporator’s Statement
- Adopt the Certificate of Incorporation
The organizational meeting should be memorialized in meeting minutes by an incorporator or director and stored with the corporate records. Delaware does not mandate recording of meeting minutes, but it is still advisable to maintain them.
For more information on Delaware corporate law, see: Delaware Code Title 8 - Corporations.
6. Choosing Initial Directors
At least one director must oversee the corporation. A corporate director is responsible for the adoption, amendment, and repeal of operational bylaws and the election, supervision, and removal of officers.
During an organizational meeting, the incorporators should elect the board of directors, or the initial directors should appoint officers.
The initial corporate directors will serve on the board until the first annual shareholders meeting, at which board members are elected by the shareholders.
7. Executing an Incorporator’s Statement
The Incorporator’s Statement includes the complete name and address of each initial director. Initial directors serve until the board of directors is elected during the first shareholders meeting. The Incorporator’s Statement should be preserved with the rest of the corporate records.
8. Preparing Corporate Bylaws
Bylaws are simply a corporation’s rules dictating the actions of its members. Bylaws must be kept up-to-date and are amended by calling a special meeting. Bylaws may provide:
- How the corporation will be governed (the roles of the directors and officers)
- How meetings are held, how voting is done, and how officers and directors are elected
- How a “quorum” is defined for voting purposes
- The date of the annual shareholders meeting
- How notice of meetings will be given (notice is required in Delaware if stockholders will be required or permitted to act at the meeting)
- How records are kept and managed, including meeting minutes
- How disputes are resolved
- How contracts are negotiated
- How bylaws are amended and kept up-to-date
- Fiduciary duties to the corporation (e.g., the duties of care and loyalty)
9. Issuing Stock
Stock may be issued to shareholders in exchange for a variety of valuables, including cash, property, services, or all three. A stock transfer ledger should record each shareholder’s name and contact information.
Shares of stock are considered securities. Federal law exempts private offerings (non-advertised sales of stock to a limited number of individuals) from federal securities law, so long as a corporation files Form D within 15 days of the first sale. If a corporation uses Rule 506(b) as its exemption, the stocks issued will be restricted securities.
Delaware similarly exempts the non-advertised sale of shares to 25 or fewer non-accredited investors or any number of accredited investors (so long as the shares are purchased as investments). A corporation that qualifies for a limited or private offering exemption under federal law is also exempt under Delaware law but must file Form LOE with the Investor Protection Unit within 15 days of the first sale.
Corporations interested in selling stock publicly or to a large number of investors should consult a business lawyer.
10. Complying with Delaware Tax and Regulatory Requirements
A corporation must apply for an Employer Identification Number (EIN) or Federal Tax Identification Number (FTIN) to open its business bank account, pay federal and state taxes, and hire employees. A corporation may apply for an EIN from the IRS online or by mail.
All Delaware corporations pay franchise tax and file a franchise tax report with the Delaware Division of Corporations on or before March 1 annually (exempt corporations still file the report). Delaware corporations that pay wages must register with the Department of Labor’s Division of Unemployment Insurance and Office of Workers’ Compensation. Unlike most states, Delaware does not charge sales tax on goods and services.
If a Delaware corporation elects to operate as an S corporation, it must submit Form 2553 Election by a Small Business Corporation to the IRS. Form 2553 must be filed within two months and 15 days of the beginning of the tax year when it is to be effective.
Incorporators should check for other necessary business licenses, such as health permits if opening a restaurant. Licenses may be necessary on the federal, state, and local levels.
Delaware’s “One Stop” is a useful resource for business registration and licensing.
