What Is a Delaware Corporation?
A Delaware corporation is a type of legal business entity that provides limited liability protection for its owners and managers. When a business forms as a corporation, the company becomes a legal person separate from the real people who own the company and run its daily operations.
A business can be incorporated in Delaware no matter where its headquarters are located. Entrepreneurs from all over the world incorporate their companies in Delaware to take advantage of the state’s advanced legal protections.
Why Choose a Delaware Corporation?
Delaware stands out as the premier state to incorporate because of its business-friendly legal environment. Entrepreneurs, investors and legal experts from all over the world acknowledge Delaware’s corporate laws as being the gold standard for limited liability protection.
Some of the largest companies in the world choose to incorporate in Delaware. Alphabet Inc. (Google), AT&T, Walmart, General Motors, and Ford are all household names that call Delaware their legal home.
More than 66% of Fortune 500 companies are incorporated in Delaware according to the Delaware Division of Corporations. In 2021, 93% of U.S. initial public offerings (IPO) were registered in Delaware.
But what elevates a Delaware Corporation above the rest?
Do Delaware Corporations have Global Recognition?
Delaware corporations can operate in any U.S. state and over 100 countries. Establishing your company under Delaware law provides your business with a competitive advantage in terms of limited liability protection.
Do Investors Prefer Delaware Corporations?
Delaware has long been known as a business incorporation hub. But why do investors choose Delaware-incorporated entities?
Much of this preference comes from Delaware’s strong corporate laws, efficient court system, and extensive case law. This is known as the “Delaware Advantage”. Delaware’s solid legal framework cuts down on legal uncertainties. This predictability is crucial to companies looking to expand by taking on outside investment.
The Wall Street Journal drove home this point in a study by showing that Delaware corporations achieve valuations that are about 5% higher than their competitors incorporated in other states. This number represents the trust and confidence that investors have in the Delaware corporate ecosystem.
Investors also tend to feel more comfortable investing in Delaware corporations because of the state’s pro-business attitude and clear legal precedents. These factors allow Delaware corporations to attract capital more easily, negotiate better terms, and compete effectively in the marketplace.
Why is Delaware Corporate Law Considered the Best?
When it comes to corporate case law, Delaware doesn’t just follow the trends; it sets them. The state has meticulously developed and refined its corporate laws over decades. Delaware corporate law is considered to be the gold standard and is taught in law schools all over the country.
Consistency and predictability are two key pillars of Delaware’s corporate legal system. Companies that incorporate in Delaware benefit from a clear understanding of how the state’s courts will interpret various business situations.
Moreover, Delaware’s Court of Chancery, a specialized court for business disputes, boasts a bench of well-respected judges who exclusively handle corporate matters. Their expertise ensures that complex business cases receive a thorough and knowledgeable review. This level of specialization is unparalleled and ensures corporations that their issues will be understood deeply and judged fairly.
Why Do Top-Tier Companies Choose Delaware for Incorporation?
Industry giants like Google and AT&T choose to incorporate their enterprises in Delaware. In fact, Delaware is the legal home for more than half of the publicly-traded companies in the United States.
Delaware’s prominence in the corporate world is undisputed. Several factors contribute to Delaware’s reputation:
Consistent Corporate Laws: Companies appreciate the clarity and predictability of Delaware’s corporate laws. They know what to expect and can plan their business strategies accordingly.
Strong Legal Framework: The Delaware Court of Chancery specializes in corporate disputes, ensuring that businesses have experienced and knowledgeable judges handling their cases. This specialized approach means quicker resolutions and fair judgments.
Business-Friendly Climate: Delaware continually refines its laws to align with the changing needs of modern businesses. This proactive approach ensures companies feel supported and understood, allowing them to focus on growth rather than legal ambiguities.
What is the Structure of a Delaware Corporation?
Delaware corporations have a rigid structure centered around shareholders, directors, and officers. Let’s unpack these roles.
Who are Shareholders?
Corporate shareholders are the investors who own parts of the corporation and vote on major company decisions.
Shareholders hold ownership stakes in a corporation. They often invest during the company’s early stages and, in return, receive stock certificates from the corporation that validate their rights and ownership.
While shareholders usually don’t engage in daily business tasks, they play a vital role in making high-level decisions. Shareholders choose the Board of Directors who are in charge of setting the company’s broad direction.
Who are Directors?
Corporate directors are the decision-makers who determine the corporation’s direction and organizational decisions.
Directors steer the corporation’s course. Every director contributes to the Board of Directors, which is the team dedicated to driving the company’s vision. This board checks the company’s progress, ensuring it aligns with set goals.
Shareholders choose the directors for their expertise in making pivotal business decisions. Instead of delving into daily operational tasks, directors concentrate on overarching strategies that mold the company’s trajectory. Directors might choose to introduce a new product, expand to a different location, or funnel funds into research and innovation.
The Board of Directors convenes multiple times a year to evaluate the company’s health, revisit strategies, and finalize important decisions. These sessions often involve studying financial data, exploring market shifts, or green-lighting significant ventures. Delaware incorporation laws require corporations to hold at least one substantial board meeting each year. This is known as the Annual Meeting.
Another significant responsibility for directors is appointing the corporation’s officers. The directors’ selections aim to ensure smooth and effective company management.
Who are Officers?
Corporate officers are the managers are in charge of daily operations and implementing decisions made by the board.
Officers take charge of the corporation’s day-to-day tasks and duties. Common officer titles in a corporation include “President,” “Treasurer,” and “Secretary”.
The President, frequently the CEO (Chief Executive Officer) as well, usually holds the top position in the company. They make pivotal decisions about a company’s operations and chart the company’s path forward. Additionally, the President bridges communication between the Board of Directors and the company’s broader team.
What Are the Different Types of Delaware Corporations?
Delaware offers several corporate structures to fit specific business needs. Let’s explore these tailored options.
What is a General Corporation?
A standard Delaware corporation is also called a “general corporation”. General corporations are owned by shareholders who choose the company’s directors. The directors lead company strategy and appoint officers to manage day-to-day business operations.
What is a Close Corporation?
Before LLCs gained popularity, businesses opted for close corporations for a more simplified management structure. A close corporation can choose to not have a Board of Directors.
What is a Non-stock Corporation?
Non-stock corporations are typically used to form non-profit organizations. A non-stock corporation does not have traditional shareholders. Instead, they have members who operate the business but are not beneficial owners. This aspect of non-stock corporations allows these entities to qualify for 501(c)(3) tax exempt status from the IRS.
Members of a non-stock corporation do not receive a financial benefit from the company’s operations. The company’s bylaws control the election of the company’s officers and how business operations are conducted.
What is a Delaware Public Benefit Corporation?
Delaware Public Benefit Corporations (PBCs) are able to balance running a profitable business with doing good for the planet. Unlike a general corporation, Delaware PBCs are not required by law to solely maximize shareholder value.
Delaware PBCs include specific public benefit purposes into their foundational corporate documents. Directors and officers of the PBC can use company resources to advance these public benefit causes without being accused of waste by the company’s shareholders.
What Does C-Corporation and S-Corporation Mean?
The terms “C-Corp” and “S-Corp” refer to the types of federal tax elections that a corporation can make with the IRS. A corporation’s tax election can shape its operations and profitability. Let’s break down the differences between C-Corporations and S-Corporations.
What is a C-Corporation?
The C-Corp election is the default tax election for corporations. A C-Corp is taxed on its income once at the corporate level, and a second time when dividends are paid out to shareholders. C-Corps are known as being subject to “Double Taxation”.
Despite Double Taxation, C-Corps provide many benefits to large corporations with ambitions of becoming publicly traded companies. For example, C-Corps can issue multiple classes of stock with different rights and privileges, and there is no limit on the number of shares that the company can authorize.
What is an S-Corporation?
The S-Corp tax election is popular amongst small businesses and family owned corporations. An S-Corp passes its taxable income down to its shareholders who report distributions on their personal tax returns.
Business owners can use the S-Corp election to potentially reduce the amount they owe in self employment taxes. However, the S-Corp election does come with some important restrictions. For example, an S-Corp can only issue one class of stock and is only allowed up to 100 shareholders. Additionally, shareholders in an S-Corp can only be natural persons, and the company cannot have any foreign shareholders.
Which Documents Are Vital for a Delaware Corporation?
Every Delaware Corporation must maintain key records to ensure smooth operation and legal compliance. Let’s highlight the most crucial documents.
What Are Delaware Corporate Bylaws?
Delaware corporate bylaws are like the blueprint for how a corporation is operated. The bylaws set the procedures for shareholder meetings, officer elections, and elections to the Board of Directors. A Delaware corporation typically adopts its bylaws during the minutes of the meeting of the incorporator when the initial directors are named.
Corporate bylaws are essential governance tools. To ensure clarity and streamlined operations, bylaws must address:
- Stockholder Voting Procedures: Detailing the method for stockholder voting.
- Financial Oversight: Identifying individuals or departments responsible for managing company funds.
- Board Meeting Guidelines: Outlining the protocols for board meetings.
- Meeting Quorum: Specifying the required minimum stockholder attendance to initiate a meeting.
- Voting Mechanisms: Establishing protocols for proxy voting and electronic voting for stockholders.
- Board Composition: Defining the number of directors, along with election procedures.
- Director Tenure: Stating the duration a director will hold their position.
- Officer Selection: Outlining the process for choosing officers.
- Roles and Responsibilities: Describing the titles and respective duties of each officer.
- Amending Bylaws: Setting rules for modifying bylaws in the future
What is Included in the Delaware Annual Report?
The Delaware Annual Report provides a snapshot of a corporation’s directors each year. The Delaware Annual Report requires the names and address of the company’s current directors, as well as the company’s principal business address. The report is signed by one of the corporation’s officers and filed with the Delaware Division of Corporations.
The Delaware Annual Report is due by March 1st of each year. Corporations also need to pay the Delaware Annual Franchise Tax when submitting their Annual Report. The state calculates a corporation’s franchise tax based on the total valuation of the company’s shares.
Most states require corporations to complete an Annual Report in order to remain compliant with corporate laws. A Delaware corporation will lose its Good Standing status with the state if the company fails to file an Annual Report before the deadline. The Delaware Secretary of State will administratively cancel a corporation and put the company into “void” status if the Annual Report is not filed for three consecutive years.
How To File a Delaware Corporation
(Please note that corporations must include a corporate ending or abbreviation such as “Inc.,” “Incorporated,” “Company,” “Co.,” or “Corporation.”)
Once your order is complete, our team of Incorporation Specialists will do the following:
- Prepare and file your Certificate of Incorporation
- Execute the Minutes of the Meeting of Incorporator to elect one or more of your directors
- Prepare Bylaws to govern your corporation
- Prepare the Unanimous Action of Directors to elect officers and direct stock to be issued to one or more stockholders
- Prepare stock certificates for one or more stockholders
We make the process easy for you! Get started and file your Delaware Corporation now!