The Types of Delaware Corporations
Two-thirds of the publicly-traded corporations constituting the S&P 500 are incorporated in Delaware. These Delaware Corporations are all “General” Corporations. Smaller corporations can also benefit from the Delaware General Corporation Law by incorporating in Delaware. This information is intended to distinguish three other types of corporations, including the non-stock, and public benefit.
The Delaware General Corporation is the most popular type of corporation for a small business. It has the ability to go public and raise money by selling shares of stock in the corporation. The un-waivable formalities and built-in fiduciary duties add to predictability, leading to investor confidence for corporations large and small. Many choose Delaware for their corporate home because the courts tend to protect directors’ decisions form being challenged by stockholders. This allows directors to run corporations with a large degree of protection when taking business risks without personal liability for what may be viewed in hindsight as a poor decision if made on an informed basis, through a fair process, at a fair price, and not a self-dealing basis. Fast growth and large profits require risk assumption, which directors of a Delaware Corporation can allow a corporation to take on with confidence.
The General Corporation creates a three-tier formal structure consisting of stockholders, directors, and officers. The reason the term “general” is used for the traditional corporation is because the law contained in Title 8 of the Delaware Code is known as the Delaware General Corporation Law or DGCL for short. In the Code, it provides for the roles of stockholders, directors, and officers as follows:
Stockholders own the corporation through shares of common stock. Most corporations have one class of common stock. They have voting rights and elect the company’s Board of Directors. They also vote on major decisions to sell the corporation or substantially all of its assets. Typically, one share of stock is equal to one vote. They are required to meet at least once per year. They are also distributed their share of profits when (and if) the corporation’s Board of Directors declares a dividend.
Directors set the course for the corporation. By majority rule, they make major strategic decisions and oversee its officers’ conduct. Directors hold periodic meetings no less than once per year and appoint officers who are employees of the corporation. The directors are elected by the majority vote of the corporation’s stockholders. If provided for in the Bylaws, elections may be staggered (like in the U.S. Senate) and voting may be cumulative to give minority stockholders more influence in election someone to the Board of Directors.
Officers run the day-to-day operations of the corporation and have titles such as “president,” “secretary,” and “treasurer.” The corporation’s Board of Directors hire and fire the officers.
Note: For small businesses, it is possible for one person to be the sole stockholder, sale director, and carry all officer titles.
Benefits of the Delaware General Corporation
- Formal structure that is well-understood and predictable
- Clear division of rights and responsibilities
- Ability to raise money by selling shares of stock
- No size limit
- Officer and Director fiduciary duties built-in to protect stockholders
- Defaults to C-Corporation tax status
- Provided it has less than 100 stockholders, all of which are U.S. citizens or green card holders, it has the ability to elect an S-Corporation tax status. Under an S-Corporation tax election, profits and losses are “passed through” to shareholders for federal tax purposes. This avoids double taxation of the C-Corporation, the tax classification that every corporation defaults to. It also avoids unreasonable compensation problems in C-Corporations. Learn more about S-Corporations.
Non-profit corporations are non-stock corporations which have three additional provisions in their Certificate of Incorporation, which are required to be eligible to apply for a tax determination letter from the IRS to obtain non-profit status under Section 501(c)(3). These non-stock corporations must have a religious, educational, scientific, or charitable purpose.
One of the biggest differences between non-stock (non-profit eligible) and other forms of Delaware Corporations is eligibility to obtain a Section 501(c)(3) tax exemption from the IRS. In order to obtain this tax-exempt status, a corporation will first form a non-stock corporation and then submit IRS Form 1023 within 15 months of the date of incorporation. If the IRS Form 1023 application for tax exemption is approved, then the determination is retroactive to the incorporation date. Non-profits with less than $50,000 in projected annual revenues may submit the 1023-EZ, a short-form application with expedited review for a tax determination letter from the IRS.
A corporation that obtains a 501(c)(3) tax status as a public charity has the ability to receive financial contributions and have the donors treat their contributions as charitable deductions. That way, the donors can deduct 100% of their contributions to the corporation on their personal tax return, provided the total donations do not exceed 50% of the donor’s adjusted gross income.
Non-profit corporations do not issue stock and therefore do not have stockholders. Instead, they have members, who run the corporation through a Board of Directors. Instead of profits going to owners, the profits stay in the corporation to be used for a charitable purpose. LLCs are not eligible to apply for tax-exempt status. An LLC may be tax exempt if it is wholly owned by a non-profit corporation.
Benefits of the Delaware Non-Stock Corporation
- Designed for corporations with a religious, educational, scientific, or charitable purpose—without owners
- Ability to apply for a 501(c)(3) tax status from the IRS to be a non-profit corporation
- Controlled by members who elect Board of Directors—The IRS will want to see at least three unrelated individuals as directors.
Public Benefit Corporation
A variation on the General Corporation in the State of Delaware is the public benefit corporation. The public benefit corporation allows the directors to consider specified public interest and not just maximize profits when making business decisions, to the extent provided for in the Certificate of Incorporation and biennial reports to its stockholders.
This differs from the General Corporation, where directors have a fiduciary duty to maximize profit and therefore value on behalf of the stockholders.
A Delaware Public Benefit Corporation must state that it is a public benefit corporation in its Certificate of Incorporation and name at least one public benefit it intends to provide. Pursuant to the Delaware General Corporation Law, the benefit can include (but is not limited to) an “artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature.” The public benefit is reviewed by the Delaware Secretary of State before it is approved. After this initial approval, no future review of operations will be required by the State of Delaware to maintain this qualification as a public benefit corporation.
The public benefit corporation’s Board of Directors is expected to consider the corporation’s business interests and the specific public benefit (or benefits) identified in its Certificate of Incorporation.
At least every two years, the public benefit corporation Board of Directors is required to provide its stockholders with a statement of the corporation’s public benefit and the progress the corporation has made toward it.
A for-profit General Corporation can amend its Certificate of Incorporation to become a public benefit corporation with 90 percent stockholder approval (followed by approval by the Delaware Secretary of State).
In addition to filing as a public benefit corporation (also known as a “B-Corp”), a private organization called B Lab has an application to be further certified as a public benefit corporation. This B Lab application is not required under Delaware law. Completing the B Lab application allows the corporation to advertise it is B Lab certified.
Benefits of the Delaware Public Benefit Corporation
- Provides a special designation to allow corporations to be socially-responsible
- Helps socially responsible investors to identify corporations that are permitted to make a specific social contribution
- Allows directors to provide a public benefit and not simply maximize profits
The close corporation is an antiquated form of corporation which predates the LLC. A Certificate of Incorporation can designate a Delaware Corporation to be a “close corporation.” That allows for a small corporation to eliminate the Board of Directors to allow stockholders to assume the role of the board. We do not recommend the close corporation because they were designed to bypass some formalities. Today, people who do not want the formalities of a General Corporation instead form a limited liability company.
IncNow.com can file your Delaware General, non-stock eligible to apply for non-profit status, or public benefit corporation, quickly and easily. Simply choose your corporation package and fill out our online corporation order form. To form a non-profit corporation, please select “Non Profit Corporation” rather than “Corporation” in the drop-down menu. If you want a benefit corporation, you must state that in the “Additional Comments” box on the order form.
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