What to Consider Before Forming a Delaware Entity

Deciding where to form your business involves many factors, including family considerations, available workforce, the state’s tax structure, the extent to which there are business-friendly laws, and the target market. When an owner has the flexibility or opportunity to organize a business anywhere, many owners opt for Delaware. According to the state’s website (corp.delaware.gov), over 66 percent of Fortune 500 companies are incorporated in Delaware. Why is that? Delaware is attractive to businesses for several reasons:

  • Business-friendly. Delaware’s laws tend to favor businesses more than those of other states. It is well known for having a court (the Court of Chancery) that works hard to resolve corporate disputes. This court only handles business issues, commercial litigation, and real estate disputes. The court is unique in that it specializes in corporate law and is able to masterfully resolve even the most complex corporate disputes. Also, the cost to form a limited liability company (LLC) or corporation is generally less and the annual fees and reporting requirements are lower than in other states. Investors often prefer Delaware businesses due to the business-friendly laws.

  • Privacy. Did you know that Delaware LLCs do not need to list the names and contact information of the members in their filings? If corporations file using a third-party in corporation service, they can also avoid disclosure of the names of shareholders, directors, and officers (though the annual franchise payment does require the directors to be listed).

  • Tax benefits and asset protection. The state does not have a sales tax, use tax, inheritance tax, business property tax (county tax may be assessed), or stock transfer tax. Delaware does not tax companies that only do business outside of Delaware and have no business office in the state. The state further provides an advantage toLLCs by protecting the business’s assets from lawsuits against the owners and protecting LLC owners’ personal assets from claims against the LLC.

This all sounds great, but before forming your business in Delaware, be sure to consider the following factors:

  • Target market and viability. Test your intended product or service to make sure there is a market for it. If you market your product or service, can you generate enough income to sustain and grow your business? Is the market large enough to sustain both you and competitors? Also, what start up costs and difficulties will you face?

  • Structure. Before organizing your business in Delaware (or in any state),decide on the best legal structure for your business. Obtain advice from a business law attorney about whether you should form a sole proprietorship, partnership (or limited partnership), LLC(or series LLC), or corporation.

  • Business name and plan. Before deciding on a website, brand, logo, etc., make sure the business name you want is not already in use Delaware allows you to reserve a name for 120 days. When you are thinking about your prospective business’s name and getting ready to form it, create a business plan. Include budgets, goals, and strategies for the business.

  • Registered agent requirement. Corporations and LLCs in Delaware are required to have a registered agent with a physical street address in Delaware. A registered agent can receive mail and agrees to be served (in the case of litigation) on behalf of the LLC or corporation.

  • Registration papers. Although there is some variation in what is required based on the structure you choose, you will need to file certain papers with the state:

  • Sole proprietorship: Typically, no documents are necessary unless you use a business name other than your own (and then file a doing business as (DBA) registration).

  • General partnership: Submit a State of Delaware Statement ofPartnershipExistence, and, although it is not required by state law, create a partnership agreement.

  • LLC: File a State of DelawareCertificate of Formation of Limited LiabilityCompany, and although it is not required by state law, create an operating agreement.

  • Limited partnership: Submit a State of Delaware Certificate of Limited Partnership, and, although it is not required by state law, create a partnership agreement.

  • Corporation: File a State of Delaware Certificate of Incorporation, appoint a board of directors, and adopt bylaws to govern how the corporation will run. Along with filing the appropriate registration documents and creating the governing agreement, all Delaware businesses are required to have a Delaware businesses license from the Division of Revenue.Depending on the business, other licenses and permits may also be required.

  • Tax planning. Once the entity is formed, get a new tax payer identification number for your business and open business bank accounts. Some banks require a Certificate of Good Standing or a certified copy of your new business filing. These items can be ordered at the time of your registration. Make an appointment with a licensed tax professional to plan for state business tax obligations. While there are tax benefits, and taxes are (overall) lower than many other states, there are certain taxes that may apply to your business including: (1) gross receipts tax; (2) employer withholding taxes; (3) Delaware state corporate income tax; (4) franchise tax (for corporations) and (5) annual tax (LLCs, LPs and general partnerships).

Finally, before moving your business to Delaware (or forming in Delaware and doing business in another state), determine if Delaware is the right place for your business. Is privacy important to you? Does your business have a high risk of litigation making experienced courts (and a shorter time to trial) beneficial?If the answer to both of those questions is yes, then forming a Delaware entity may be a good idea. If not, then you should weigh the costs and benefits of forming the business in Delaware If you operate in both Delaware and another state(s), you will need to file and stay compliant in both. This means there may be annual costs and formalities for each state in which you are licensed to do business. Before forming in Delaware, you should consult with a business lawyer licensed in Delaware who is familiar with its possible traps and requirements.