As a new business owner, one of the most important decisions you’ll make is where to incorporate your business. While there are many states to choose from, Delaware has become a popular choice for businesses of all sizes and types. Nearly 67% of Fortune 500 companies are incorporated in Delaware, as are many small and midsize businesses. And 93% of the companies that went public in 2021 were incorporated in Delaware.

Delaware isn’t in this position by accident. Since the colonial era, the state has intentionally cultivated a financial, legal, and regulatory environment that’s designed to attract businesses—and they’ve been quite successful.

However, every business is unique, and the decision of where to incorporate depends on the industry, the company’s goals, and its plans for growth. It is important for new business owners to carefully consider their options and consult with legal or financial professionals before deciding where to incorporate.

In this article, we’ll give you an overview of the key benefits of forming a Delaware corporation, the different types of Delaware corporations, and the steps to forming one. We’ll also provide links to other resources that help new businesses navigate the process of incorporating in Delaware.

What’s in this article?

• What is a Delaware corporation?
  
• The history of Delaware corporations
  
• Types of Delaware corporations
  
• Benefits of forming a Delaware corporation
  
• How to form a Delaware corporation
  
• Resources for founders who want to register a Delaware corporation
  

What is a Delaware corporation?

A Delaware corporation is a corporation that is incorporated in the state of Delaware, which is located in the eastern United States. Delaware is a popular state for incorporation because it offers a number of benefits, such as a business-friendly legal system, low taxes, and a well-developed corporate legal system.

The history of Delaware corporations

The history of Delaware corporations dates back to the early 1800s, when Delaware began to establish itself as a popular location for businesses to incorporate. However, the origins of Delaware’s corporate-friendly reputation can be traced back even further to the colonial era, when the state was created.

In the early days of the United States, Delaware was one of the original 13 colonies and had a strong agricultural economy. But after the Industrial Revolution began, the state began to diversify its economy and attract more businesses. In the late 1800s, Delaware began to adopt laws that made it easier for companies to incorporate in the state.

One of the key factors in Delaware’s rise as a corporate haven was the state’s decision to establish a separate court system—the Delaware Court of Chancery—which was dedicated solely to handling business disputes. The court’s expertise in corporate law and its consistent, predictable rulings made Delaware an attractive location for businesses looking for a stable legal environment.

Over the years, Delaware has continued to refine its corporate laws and regulations to meet the changing needs of businesses. For example, in the 1900s, Delaware was one of the first states to allow companies to issue different classes of stock, which gave businesses more flexibility in how they raised capital. Today, Delaware’s corporate-friendly reputation has made it a popular location for businesses of all sizes and types, from small startups to large multinational corporations.

Types of Delaware corporations

Delaware offers several types of corporations that businesses can choose from when incorporating. Most of these are similar to the corporate-structure options in other US states.

The most common types of Delaware corporations are:

• C corporation (C corp)
  C corps are the most common type of corporation in the US, and this structure is also available in Delaware. C corps are taxed separately from their owners, and they have no limit on the number of shareholders they can have. They are required to have a board of directors, and the corporation’s profits can be distributed as dividends to shareholders.

• S corporation (S corp)
  S corps are a popular choice for small businesses, because the corporation’s profits can be passed through to the owners’ personal tax returns, avoiding double taxation. However, S corps are limited to 100 shareholders and can only issue one class of stock.

• Limited liability company (LLC)
  While not technically a corporation, LLCs are a popular option for businesses that want the liability protection of a corporation but the flexibility of a partnership. LLCs are taxed like partnerships, with the company’s profits and losses passed through to the owners’ personal tax returns. While both S corps and LLCs provide limited liability protection to their owners and offer flexibility in taxation and management structure, there are key differences between the two.

• Nonprofit corporation
  Nonprofit corporations are corporations that are formed for charitable, educational, or other nonprofit purposes. They are exempt from federal income tax, and donations made to nonprofit corporations are often tax-deductible.

• Public benefit corporation (PBC)
  PBCs are a relatively new type of corporation in Delaware, designed for companies that want to prioritize social and environmental goals in addition to financial profits. PBCs must have a specific public benefit purpose stated in their articles of incorporation and must report on their social and environmental performance to shareholders.

• Close corporation
  A close corporation is a type of corporation that is owned by a small number of shareholders and is managed by its owners. Close corporations have less strict corporate governance requirements than general corporations, and their shares are typically not publicly traded. They are often used for family-owned businesses or closely held businesses.

Benefits of forming a Delaware corporation

While Delaware has the reputation of being a popular place for businesses to incorporate, businesses should engage in a thoughtful decision-making process rather than merely follow trends. Gather a trusted team of expert advisors to weigh the unique needs and goals of your business against the advantages and disadvantages of incorporating in various locations.

However, there are benefits to forming a Delaware corporation that make it a popular option with new businesses:

Business-friendly legal system

Delaware has a long history of corporate law and a legal system that is dedicated to handling corporate disputes. Delaware judges and lawyers have a wealth of experience in handling complex corporate legal issues. For example, if your business is sued by a shareholder, the Delaware Court of Chancery is well-equipped to handle the case and make a fair ruling. This provides businesses with a stable, predictable legal environment, which can be beneficial for startups that may face legal challenges as they grow.

Flexible corporate law

Delaware offers a wide range of options for corporate governance, such as the ability to have a board of directors with staggered terms or to issue different classes of stock. This allows businesses to tailor their corporate structure to meet their specific needs. For example, a technology startup that plans to raise venture capital funding may choose to issue preferred stock to investors, which gives them preferential treatment in the event of a sale or liquidation. This flexibility can help businesses attract investors and plan for their future growth.

Low corporate taxes

Delaware has an 8.7% corporate tax rate, which is lower than many other states. Additionally, Delaware doesn’t impose taxes on companies that do not conduct business in the state. For example, if your business is incorporated in Delaware but operates solely in California, you may not have to pay Delaware state taxes. This can be a significant cost savings for businesses.

Privacy

Delaware doesn’t require companies to disclose the names of their directors and officers in public filings. This provides privacy for business owners who may not want their names publicly associated with their business. For example, if you’re a celebrity who wants to invest in a new business without drawing unwanted attention, incorporating in Delaware may be a good option.

Access to capital

Because so many large corporations are incorporated in Delaware, the state has a well-developed financial infrastructure that provides businesses with access to capital. Many venture capital firms prefer to invest in Delaware corporations because they are familiar with Delaware’s corporate laws and regulations. This can be a significant advantage for startups that need to raise money to fund their growth.

Reputation

Delaware has a reputation as a business-friendly state, which can be beneficial for businesses that operate in industries where reputation is important. For example, if you’re starting a new law firm, incorporating in Delaware may help you attract clients who are familiar with the state’s reputation for corporate law. Additionally, incorporating in Delaware can help businesses signal to investors and partners that they are serious about their long-term growth and success, from Day 1.

How to form a Delaware corporation

The process of forming a Delaware corporation is similar to incorporating in other US states:

1. Choose a name

The first step in forming a Delaware corporation is to choose a name for your business. Your name must be unique and not too similar to the name of any other business registered in Delaware. You can search for available names on the Delaware Division of Corporations website.

2. File articles of incorporation

Once you’ve chosen a name for your business, you’ll need to file articles of incorporation with the Delaware Division of Corporations. These articles outline basic information about your business, such as its name, address, and purpose. You’ll also need to include the names and addresses of your initial directors and officers.

3. Appoint a registered agent

Delaware law requires that all corporations have a registered agent with a physical address in Delaware. The registered agent is responsible for receiving legal notices and other official documents on behalf of the corporation. You can hire a registered agent service or appoint an individual who lives in Delaware to serve as your registered agent.

4. Draft bylaws

Once you form your corporation, create bylaws that outline the rules and procedures for running your business. These should include information about how your board of directors will be elected, how meetings will be conducted, and how decisions will be made.

5. Obtain necessary licenses and permits

Depending on your business’s industry and specific jurisdiction, you may need to obtain certain licenses or permits to operate legally. Check with the Delaware state and local government to see which licenses and permits are required for your business (see the resources listed below).

6. Hold an initial board of directors meeting

Hold an initial meeting of your board of directors to approve your bylaws and other important documents. This is also a good opportunity to discuss the goals and direction of your business with your board.

7. Issue stock

Finally, issue stock to your shareholders. This will give them ownership in the corporation and allow you to raise capital by selling shares. You’ll need to file a stock certificate with the Delaware Division of Corporations and keep accurate records of all stock transactions.

Resources for founders who want to register a Delaware corporation

Delaware provides a number of valuable resources to help businesses in their infancy and as they grow. Here are useful links for new businesses that are interested in forming a Delaware corporation:

• Delaware Division of Corporations: This is the official website of the Delaware Division of Corporations, which is responsible for registering and regulating corporations in the state. The site provides information on how to form a corporation, as well as access to forms and filings.

• Delaware One Stop: This is a one-stop shop for businesses in Delaware, providing information on how to start and run a business in the state. The site includes resources on licensing and permits, taxes, and other business-related topics.

• Delaware Small Business Development Center: This organization provides free counseling and support to small businesses in Delaware. They offer resources on business planning, financing, marketing, and more.

• SCORE Delaware: This is a nonprofit organization that provides mentoring, counseling, and educational resources to small businesses in Delaware. SCORE volunteers are experienced business professionals who can provide guidance and support to new entrepreneurs.

• Delaware State Chamber of Commerce: This is the state’s largest business advocacy organization. The chamber provides networking opportunities, advocacy on behalf of businesses, and access to resources and services.

• Delaware Business Roundtable: This is a nonprofit organization that convenes business leaders from across the state to discuss and advocate for policies that promote economic growth and job creation.

• Small Business Administration Delaware District Office: This is the Delaware district office of the US Small Business Administration, which provides support and resources to small businesses across the country. The Delaware office provides information on loans, grants, and other assistance programs for small businesses.

17. Consider business loans

Using business loans as a part of your financial strategy can be a powerful step to expedite your business growth. Here’s how to approach this step:

• Determine your need for a loan: Before jumping into the loan application process, assess whether you have a genuine need for a loan. Maybe you need funds for expanding your operations, buying equipment, increasing inventory, hiring staff, or smoothing out cash flow. Getting clear about your business’s financial needs can help you make a more informed decision about applying for a loan.

• Research different types of loans: There are different types of loans available for businesses, from traditional bank loans and Small Business Administration (SBA) loans to alternative online loans and lines of credit. Each type comes with its own terms, interest rates, and requirements. The right choice for you will depend on your specific needs, financial situation, and the stage of your business.

• Consider eligibility requirements: Lenders have varying criteria for approving loans. These can include factors such as your credit score, business revenue, the profitability of your business, and how long you’ve been in operation. Before applying for a loan, carefully check these criteria to see if you qualify.

• Prepare your loan application: Once you’ve chosen a type of loan and confirmed that you meet the lender’s criteria, the next step is to prepare your loan application. This involves compiling financial documents such as your business plan, financial statements, tax returns, and details of your collateral. You may also need to present a plan outlining how you intend to use the loan and how you will repay it.

• Compare loan offers: If your loan application is approved, you may receive offers from different lenders. Consider each offer’s terms carefully, including the interest rate, loan amount, loan term, and any additional fees. Be sure you understand the total cost of the loan and how the repayment terms align with your business’s financial projections.

Taking on debt is a serious commitment that demands careful planning and consideration. For additional guidance throughout the process, consult with a financial advisor or mentor.

There’s no easy shortcut to starting a business. Cutting corners or skipping steps in the early days can create unnecessary friction, confusion, or even legal liability down the road. But while much of the work that goes into starting a new business might seem tedious, it’s not overly complicated. If you take a thoughtful and methodical approach to this process, and address each step in the correct order, you’ll build a foundation that can support all the goals and dreams you have for your business—exactly what motivated you to begin this journey in the first place.