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Delaware is a great place to start a business. Although it’s the second smallest state in the U.S., a combination of a great location, lots of travel hubs, a business-friendly environment, zero sales tax and plenty of people make it an excellent choice.
Delaware businesses are leaders in many sectors including banking, pharmaceuticals, technology, healthcare, farming, retail and more. In fact, more than half of all U.S. publicly traded companies and almost two thirds of the Fortune 500 are incorporated in Delaware. The state has long been a favored place for large businesses to incorporate because the case law in Delaware strongly protects them.
Although these advantages may protect large national corporations, they do not not necessarily extend to small businesses who do not operate in Delaware — they must still qualify and be able to do business in their home state to be officially recognized. Under most circumstances, we recommend that small businesses operating in a single state incorporate in that state. Of course, if you already live in Delaware, that makes it an ideal choice.
If you want to start a business in Delaware, you have a choice of an LLC, an S Corporation or a C Corporation. Each of these has different rules for how it’s treated by the Delaware Division of Corporations, the law, the IRS and other official bodies. That means it’s important to choose the right business structure for you.
Here’s a quick overview of each type of business entity.
These are the simplest type of business and will be the “default” type of DE business you have if you do not choose to form a separate business entity. These types of businesses do not provide you with any special protections or benefits and can leave your personal assets vulnerable. We do not recommend them.
LLCs are a great option for smaller DE businesses. LLCs are quick and easy to create, inexpensive to administer, light on regulations and have simple taxation and rules. You can learn how to create an LLC in Delaware here.
You might choose to form a Delaware S Corporation because it’s a good compromise between the simplicity of the LLC and the complexity of the C Corporation. Note that DE S Corporations are subject to more rules and regulations than a DE LLC, but they can mean that you pay less tax.
Delaware C Corporations are the most complex type of business. They are best suited to larger businesses and are necessary if shares in the business will be traded on public stock markets. C Corporations have much more significant regulation, compliance and legal rules, and they are not as tax efficient as S Corporations or LLCs.
There are some other business entity structures like nonprofits, Limited Liability Partnerships (LLPs) and B Corporations, but they will not be relevant for the majority of entrepreneurs.
Delaware corporations have several benefits for business owners.
Delaware corporations provide the strongest form of liability protection possible. They insulate your personal assets and finances from those of your business.
This means that any liabilities created by your corporation (debts, obligations, damages, bankruptcy or other liabilities) should not impact your personal money, property or assets — they are considered completely separate from a legal perspective.
There are several reasons an entrepreneur might choose to form a DE corporation instead of a Delaware LLC.
A Delaware S Corporation will often pay less self-employment tax on owner earnings than an LLC. Note that a DE LLC can choose to be treated as an S Corporation for tax purposes by filing Form 2553 with the IRS, which removes this restriction. Delaware C Corporations do not have this advantage over an LLC.
Delaware S Corporations and C Corporations make it much easier to buy, sell and transfer stock. C Corporations also allow you to file an IPO and list stock on the public stock market.
C Corporations provide certain benefits when it comes to buying, selling and transferring stock. Here are the rules for both S Corps and C Corps:
If you want up to 100 shareholders who are U.S. citizens or residents and want to issue one type of stock, you can be an S Corporation or a C Corporation.
If you want more than 100 shareholders, want to issue more than one type of stock or have international shareholders, you will need a C Corporation.
If you want to allow the public to buy and sell shares in your company after an Initial Public Offering (IPO), you will need a C Corporation.
Learn more about the differences between business entities.
In addition to the general benefits above, DE S Corporations provide several other advantages:
Delaware S Corporations can have up to 100 shareholders.
Running an S Corporation in Delaware is simpler than running a C Corporation.
It is easy to transfer ownership in an S Corporation by selling your stock.
In some cases, part of the income from an S Corporation can be paid as a “distribution” rather than “salary,” so it would not be subject to self-employment tax. Find out how this can save you money using our S Corporation Tax Calculator.
LLCs can choose to be taxed as S Corporations to take advantage of this.
In addition to the general benefits above, Delaware C Corporations provide several other advantages.
Ownership in a Delaware C Corporation is very fluid and determined by who owns stock in the business.
Delaware C Corporations can list their shares on a public stock exchange. This stock can be bought and sold by anyone.
Delaware C Corporations can sell stock to investors inside and outside the U.S.
Delaware C Corporations can issue more than one type of stock.
Delaware C Corporations can raise more funds by issuing more stock.
Here are some areas to be aware of when you’re creating a corporation in Delaware.
First, DE corporations are formed on the state level by filing a Certificate of Incorporation with the Division of Corporations. Incfile specializes in helping entrepreneurs form Delaware S Corporations and C Corporations and can collect the information and file this form on your behalf.
When you incorporate a business as a corporation, the Delaware Division of Corporations will treat your business as a C Corporation by default. A C corporation will become an S Corporation when all shareholders wish to change the corporation’s status to an S Corporation with the IRS. You can make this choice when you first form your Delaware corporation or at any time after you incorporate.
There are some similarities and some differences between S Corps and C Corps:
Similarities: Delaware S Corporations and C Corporations have similar rules and regulations for liability, governance, management and ownership
Differences: Key differences are taxation and the ease of buying, selling and transferring stock
All DE corporations must issue stock to shareholders.
All DE corporations must hold Annual General Meetings (AGMs).
All DE corporations must have an elected Board of Directors.
All DE corporations must appoint officers.
All Delaware corporations must follow stringent compliance rules and regulations. These include financial reports, bylaws, corporate formalities, taxes, fees, business licenses and the like. You can find links to these below.
Are you ready to start your Delaware corporation? If so, we can help. We provide comprehensive corporation formation services for both S Corporations and C Corporations in Delaware.
You’ll find plenty more insight and guidance on the other pages of this guide, including:
The six steps you need to take to start a Delaware S Corporation or C Corporation.
How to search the Delaware business registry of the DE Division of Corporations and find the right name. Includes information on naming rules, fictitious names, reserving a Delaware corporation name and more.
How to appoint a Delaware Registered Agent to your new corporation or change to a different Registered Agent. Includes information on Registered Agent rules and searching for Delaware Registered Agents.
How to understand the various fees you’ll need to pay and the requirements you’ll need to meet for both federal and Delaware rules. Includes details of Employee Identification Numbers (EINs), Delaware and federal business licenses, Delaware Franchise Tax reports and more.
How to understand the various taxes you will need to pay to the federal and Delaware government. Includes details of federal taxes like income and self-employment, and Delaware taxes like sales tax and income tax.
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This report is mandatory and must be filed within the specified time frame in order for the entity to remain in good standing with the state. Failure to file this report can lead to the company being revoked or administratively dissolved.
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