Choosing where to incorporate can significantly affect the trajectory of your business. Delaware is the preferred jurisdiction for over two-thirds of Fortune 500 companies, and Delaware incorporation appeals to businesses of all sizes—from startups to multinational corporations.

Reasons why businesses choose to incorporate in Delaware include the state’s corporate laws and robust legal system, certain tax advantages, and investor preference. Understanding these benefits, their implications, and how they may align with your business goals can help you make informed decisions about your corporate structure.

Below, we’ll explain how to form a Delaware C corporation, the benefits of incorporating and conducting business in Delaware, and other important factors that businesses should consider.

What’s in this article?

• What is a C corp?
  
• What is a Delaware corporation?
  
• Benefits of incorporating in Delaware
  
• How to start a Delaware C corp
  
• How Stripe Atlas can help
  

What is a C corp?

A C corp is a legal term that refers to a specific type of tax status conferred upon a corporation by the IRS. A C corp is a separate legal entity from its owners, as defined under Subchapter C of the Internal Revenue Code. This distinction affects several other key characteristics of C corps:

• Limited liability
  Owners, or shareholders, are shielded from personal liability in the case of debt or legal judgments against the corporation. This means their personal assets, such as houses, cars, and personal bank accounts, are protected. This limited liability is one of the primary reasons many entrepreneurs choose to form a C corp.

• Ownership flexibility
  A C corporation’s ownership is divided into shares of stock. This system allows for changes in ownership—shareholders can easily transfer, sell, or give away shares. There are no restrictions on the number of shareholders, which can enable C corporations to attract investment and grow.

• Perpetual existence
  C corporations can exist in perpetuity, independent of their founders or current shareholders. This means the corporation can outlive its original owners, making it an attractive option for founders who want their business to continue operating even after they are no longer involved.

• Double taxation
  This corporate structure has a significant drawback: double taxation. The corporation pays corporate income tax on its profits. Then, if any after-tax profits are distributed to shareholders as dividends, the shareholders must also pay personal income tax on these dividends. This can lead to a higher effective tax rate on corporate earnings.

• Management structure
  C corps must have a formal structure of governance in place. A board of directors, elected by the shareholders, oversees major business decisions and sets the business’s direction. The corporation’s officers (CEO, CFO, etc.) handle the daily operations.

• Fundraising and investment
  C corporations are particularly attractive to investors. These corporations can raise funds through the sale of various types of equity and can accommodate complex capital structures. Many venture capital firms prefer the C corp structure.

All US corporations are initially designated as C corporations as a default tax classification, unless they do one of two things:

• File Form 2553 with the IRS to opt for S corporation status, which allows for pass-through taxation and restricts the number of shareholders.
  
• File a 501(c) application with the IRS for nonprofit status, becoming exempt from federal income tax.
  

What is a Delaware corporation?

A Delaware corporation, which means a Delaware C corporation, is a business entity that has chosen to incorporate under the laws of the state of Delaware and is taxed under Subchapter C of the Internal Revenue Code. Delaware is a popular choice for incorporation because of its flexible, pro-business statutes and well-established body of case law.

Benefits of incorporating in Delaware

Similar to other C corporations, Delaware C corporations offer limited liability protection. The shareholders of a Delaware C corporation are shielded from personal liability for corporate obligations and debts. Here’s an overview of the benefits specific to Delaware C corporations:

• Advanced, flexible corporate laws: The Delaware General Corporation Law (DGCL) is highly sophisticated and adaptable, and is updated continuously to reflect evolving business practices and legal interpretations.

• Business-friendly legal system: Delaware’s Court of Chancery specializes in corporate disputes. The court operates without juries. Instead, experienced judges make determinations, allowing for faster and more predictable outcomes for Delaware businesses.

• Precedent-setting case law: Delaware has an extensive history of resolving corporate legal matters, and it has a vast body of case law that brings predictability and stability to legal proceedings.

• Privacy considerations: By not requiring officer or director names to be listed on the formation documents, Delaware provides a level of privacy to corporations that is unavailable in many other states.

• Investor preference: Many investors, particularly venture capitalists, prefer Delaware corporations because of the state’s well-understood and favorable legal environment.

• Management-friendly policies: Delaware corporate law is often seen as friendly to management. For example, it allows for single-person corporations in which one person can be the only director and hold all offices.

• Tax advantages: Delaware offers certain tax advantages. For instance, there is franchise tax, but no state corporate income tax for companies that are formed in Delaware but do not transact business there.

• Ease of incorporation: The state of Delaware has an efficient and expedient incorporation process.

How to start a Delaware C corp

Starting a Delaware C corporation involves several steps:

• Choose a name for your corporation: Your business name must be unique and not in use by another business in Delaware. You can check name availability through the Delaware Division of Corporations website.

• Appoint a Delaware registered agent: Delaware requires all corporations to have a registered agent with a physical address in Delaware. This agent is responsible for receiving official documents and legal papers on behalf of the corporation.

• File the certificate of incorporation: You’ll need to file this document with the Delaware secretary of state. It includes key details about the corporation, such as its name, the address of the registered agent, and the number and value of authorized shares of stock.

• Create corporate bylaws: These internal rules govern your corporation. They cover topics such as the structure of the corporation, shareholder rights, and how meetings are conducted.

• Appoint directors and officers: Directors oversee the corporation’s major decisions, while officers manage the day-to-day operations.

• Issue stock: This step involves issuing shares to the initial owners of the corporation.

• Obtain an employer identification number (EIN): This unique number assigned by the IRS is used for tax purposes. You can apply for an EIN on the IRS website.

• Comply with other tax and regulatory requirements: Depending on the nature of your business and where you operate, you may need to register for state and local taxes, obtain business licenses and permits, or comply with other regulatory requirements.

• File an annual report: Delaware requires corporations to file an annual report and pay a franchise tax each year.

While there are many benefits to forming a Delaware C corp—including a robust legal environment, favorable tax structures, and investor preference—the process also involves important legal, tax, and business considerations. Seek guidance from legal and tax professionals during this process to align the corporate structure with your business objectives.

How to save money when incorporating a business

While some incorporation fees are unavoidable, it’s possible to lower your business’s costs by handling as much as possible in-house and seeking professional help when necessary. Here are a few key strategies for saving money:

• DIY incorporation: If your business structure is straightforward and you’re comfortable with paperwork, filing the incorporation documents yourself can save you hundreds or even thousands of dollars in legal fees. Online resources and guides are available to help you through the process.

• Compare registered agent services: Registered agent fees vary between providers. Compare prices and services from different companies to find the best deal for your needs.

• Consider forming an LLC: Limited liability companies (LLCs) are often simpler and less expensive to form than corporations, making them a cost-effective option for small businesses.

• Choose the right location: Some locations have lower filing fees and franchise taxes than others. Research different places to see which ones have the most favorable business environment for your industry and budget. Delaware is a popular choice in the US for its business-friendly laws and low fees, for example.

• Take advantage of online legal services: Online legal services offer affordable packages that can guide you through the incorporation process and provide templates for necessary documents. Some might even have discounts and promotions for new customers. This can be less expensive than hiring an attorney.

• Negotiate professional fees: If you need to hire an attorney or accountant, don’t hesitate to negotiate their fees. Some professionals might offer discounts for startups or small businesses.

• Plan for ongoing costs: While saving on initial incorporation costs is important, make sure to factor in ongoing expenses such as annual report fees, franchise taxes, and registered agent fees.