Why Start a Business in Delaware?
If you’re thinking about incorporating a business, then you’ve decided to create a for-profit enterprise that aims to sell a product or service in exchange for revenue. The entrepreneurial spirit is a driving force behind the American economy, but you have other decisions to make after the first one. One of them is which state to incorporate in. Delaware is a great option. That’s why over 68% of Fortune 500 companies registered in this state. In fact, more than 90% of all American initial public offerings start here as well. There are many reasons you can benefit from following suit, and getting access to capital is just one of them.
In the year 2020 alone, Delaware had 250,000 new businesses registered, and that pushed the overall number to 1.6 million. Delaware is the second-smallest state in terms of geographic area, and its population is also one of the lowest. Yet, it is home to famous companies, such as Disney, Walmart, Google, Tesla, American Express, and Amazon. Since the start of the 20th century, Delaware has consistently strived to make itself a business mecca with many different benefits. They include expediency, privacy, corporation courts, simple structure, and tax advantages.
Advantages of Starting Your Business in Delaware
Delaware’s population of just over 1,000,000 is outnumbered by the number of corporations registered in the state. That speaks to how appealing this place is to businesses. Knowing the specific reasons behind this situation, however, helps you determine if these reasons might apply to your ambitions.
Investors Like Corporations Formed in Delaware
Most small business startups need funding to get going, and that means appealing to investors. Starting off in Delaware helps you do that because investors respect the startup ecosystem in a very pro-business state. The Delaware government has a pattern of strong support for new businesses, and that support takes shape in the form of research and development, innovation programs, grants, and credit programs. Aspiring entrepreneurs can benefit from investor credits and programs that facilitate small business startups. Traditional banking models might deem these startups too risky. R&D support starts at the university level, and technology is at the forefront of a lot of corporate success in the First State.
Tax Advantages
This is likely the biggest draw of the state for new corporations, and it commands attention not just across the country but also around the world. Delaware is a known tax haven. Corporations that register here but don’t do any business within the state borders don’t have to pay any corporate income tax. On top of that, the state also lacks personal property taxes, inheritance taxes, investment income taxes, and sales taxes. Certain businesses are required to pay a registration franchise tax, but even this can be a fraction of what they would pay in other states. National companies doing business in the state often get around in-state income tax by using shell companies or subsidiaries that have intangible assets but no direct business operations.
Privacy
Companies registering for business in nearly any state have to designate a registered agent that has an official physical address where mail and paperwork can be collected. However, Delaware offers corporations a level of privacy that surpasses many other states. In Delaware, the registered agent is the only person who has to have their name disclosed as being associated with the business. All other directors and officers don’t have to disclose their identities, which means that shareholders don’t need residency in the state. This anonymity level appeals to many business leaders, and you can take advantage of the potential privacy yourself.
Corporate Courts
The state of Delaware has courts that only hear corporate cases, and the Court of Chancery dates back to 1792. In these courts, litigants can have their cases heard in front of judges who specialize in only corporate law. That’s different from other states where judges might rotate between corporate cases, criminal matters, environmental law, and real estate matters. The specific focus of corporation courts means that litigants have more confidence in judges rendering proper opinions and can expedite how quickly civil lawsuits are handled.
Effective Attorneys
Corporation courts don’t just mean specialized judges but also effective attorneys. Given how many companies are registered in Delaware, there is a substantial body of case law and existing precedents that other states don’t have in the realm of business law. Consequently, most lawyers who pass the bar exam in any state have a strong familiarity with Delaware corporate law because it’s a national standard in many law schools. Delaware legal precedents are often quoted in jurisdictions in the other 49 states. It’s easy to find attorneys who can represent your business well in state court. Because there are so many of them, they tend to be rather affordable to boot, and their knowledge of state law can help you improve efficiency and minimize your legal costs.
Time Efficiency
Many states might take days to weeks to process incorporation filings, but Delaware does it quickly for the right price. You can choose from one-hour, two-hour, same-day, or next-day service filings at various price points between $1,000 and $50. The Delaware Secretary of State is very responsive when it comes to financing corporations or expediting a merger. To further simplify things, Delaware lets a single individual hold multiple positions within the company, and that means you can simultaneously be a director, an officer, and a shareholder at the same time. Other states might only permit this through LLC or sole proprietorship structures.
A Focus on Business
Delaware’s tradition of friendly business law is closely monitored and nurtured by the state legislature, and that’s for good reason. The state has a unique incentive to keep up its corporate-friendly reputation because business license fees make up 12% of the state’s revenue, whereas the national average for other states is just 0.2%. The state government keeps this up with frequent amendments to statutes and regulations across the state. Corporate license fees bring several hundred million dollars in revenue each year, which matters greatly in a state with such a small population.
How to Form Your Delaware Corporation
Once you decide to start your business in Delaware, you must go through the process of incorporating it. Each situation requires different steps, but businesses will generally go through the following sequence.
Pick a Company Name
Picking your company name is your chance to build your brand and represent your products or services. Your name needs to be distinct from other business names in the state of Delaware. You can check for name availability and even make reservations online.
File Your Certificate of Incorporation
You must legally prepare and then file your Delaware Certificate of Incorporation. Do this online or via postal mail. A minimum filing fee does apply, and it scales up based on how many shares or par value stock your business has. This is one case where the registered agent and address must be listed before Delaware’s corporate privacy laws protect everyone else involved.
Appoint Your Registered Agent
Every corporation in Delaware must have a registered agent available to accept the legal papers on behalf of the corporation in the event that the company is sued. Any agent you designate should agree to serve this role for you prior to you designating them. They need to either be a resident of the state or a business entity authorized to operate inside Delaware.
Get Your Corporate Bylaws Ready
This isn’t actually a state requirement, so you don’t have to file them. However, you need to adopt corporate bylaws to create the operating rules of your company. These do have external value in demonstrating the legitimacy of your corporation to the IRS, creditors, and banks. Once your corporation is established, these bylaws can become a legally binding agreement between your company and shareholders.
Appoint Your Directors
You must appoint the initial director or directors that will comprise the board until shareholders can elect them at their first meeting. You are legally required to have at least one director, but you can have more. Remember, Delaware corporate law lets you be a director yourself if you so choose.
Issue Stock
Most Delaware corporations can issue stock. This is something you can offer outside parties in exchange for their funding if you choose. You will get a list of authorized stock at the time of incorporation, and then you can issue shares from that. Each stock share is an equity unit of ownership in your business.
Pay Franchise Taxes and File Annual Reports
Every company incorporated in the state of Delaware must pay an annual franchise tax and file a report with it. You can do this online, and the deadline varies based on whether you’re a foreign corporation or not. Penalties apply for both past-due taxes and reports not filed by the proper deadlines.
Get a FEIN
Your corporation needs a federal employer identification number. This is an IRS requirement, but there is no filing fee for this. You can accomplish this online.
It’s Best to Start in Delaware
If you’ve already incorporated your company in a different state, you can move it to Delaware later on. However, you should consider starting in Delaware if you haven’t incorporated yet rather than plan on a move in the future. Conversion to a Delaware corporation can cost you time and money as it involves attorney fees and another filing. Incorporating in this state offers you privacy, dedicated courts for expedient business disputes, and tremendous tax advantages. Investors love seeing companies starting in this state, so getting funding is often easier to accomplish.
Get Help Starting Your Business in Delaware
Whether you decide to start a new business in Delaware or any other state, you’re likely to need funding and resources to get going. American Business Credit is here to help you. We’ve got the knowledge, experience, and network of lenders to find the right funding solutions for your entrepreneurial dreams. Get great rates on unsecured business loans for as much as $350,000, or check out our other services and products. Go through our application process without impacting your personal credit, and get the funds you need in as little as seven days.
