What is Delaware Corporation?
Delaware Corporation is those companies that are registered in the state of Delaware, however, they have the flexibility to operate their business from anywhere in the world. This is beneficial for the newly set up organization because it is easy to register in the state of Delaware as compared to other states. In addition, there are various tax advantages and also provides privacy and flexibility to the company its directors, shareholders, and members.
Types of Delaware Corporation
#1 – General Corporation
This is the most attractive type of corporation. In this corporation company owners are selling their shares to the public and raising funds from the public. In this structure, shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. are the owner of the company by owning the shares, whereas directors will handle day to day operations of the company. It is just like a public limited company.
#2 – Close Corporation
Close corporation structure is similar to a general corporation structure but in a very restricted manner. In a general corporation, the company can sell their shares publically, but in close corporation shares can be sold to within specified no. of shareholders. If anyone wants to sell his shares to an outsider, then there should be the refusal of the entire existing shareholder, then the only outsiders can buy these shares.
#3 – Public Benefit Corporation
Public benefit corporations are legally registered in the state of Delaware and certificates of incorporation of these companies are clearly marked as these are operated only for the benefit of the public, society, environment & other social benefits, not the maximize the profit of shareholders. These companies will act morally, ethically, and responsibility towards society and the public at large.
#4 – Non-Profit Corporation
The non-profit corporation does not have the shareholders like the other three types of Delaware corporation; rather, this will have a member with voting rights. These members will appoint the directors by casting their vote. Generally, activities of this type of corporation are non-profitable. Therefore, they don’t require to pay any income taxIncome TaxIncome tax accounting recognizes the income tax payable in the books of account and determines the current period's tax expenses. It has to be paid either before or after the end of the financial year and recognized in the books of account accordingly. , but it is required to file the return with all the required information.
Steps for Formation of Delaware Corporation
- Decide the corporation’s name, and it should be unique and not familiar with the other company already operating in the state of Delaware.
- File certificate of incorporation with all the details like name of the company, address, authorized capital, and other required details.
- Need to appoint an agent who is registered in Delaware who will act on behalf of the corporation.
- Prepare corporate books in which all the important papers like share certificates, minutes of the meeting will be kept.
- Prepare company internal policies that need to follow during business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation..
- Appoint initial corporate directors who will sign all the incorporations paper and serve on the board till the directors are elected in the first annual meeting of shareholdersMeeting Of ShareholdersShareholders Meeting means a meeting of the stockholders of the corporation wherein resolution are placed before the shareholders to discuss and approve the corporate matters and other matters required by the bylaws of the company..
- The first board of directors meeting will be held in which the directors will take corporate officers, corporate banks, policies, authorization of issue of sharesIssue Of SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet., and the necessary decision.
- Shares will be issued to the public and raise funds.
- Comply with the Delaware annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements. requirement, franchisee tax requirement and other regulatory requirements.
- Delaware corporation is beneficial for start-up and venture capitalVenture CapitalVenture capital (VC) is long-term finance extended to startups with high-growth potential to help them succeed exponentially. The investors are venture capitalists who bear the excessive financial risk and provide guidance to startups to attain their objectives. firms because it helps in raising funds.
- The Law of the state of Delaware is very much transparent, and there are so many cases already decided in Delaware. Therefore, it is easy to settle any future dispute and the outcome of those cases more predictable.
- Delaware corporation law/statute provides flexibility in the organization and rights and duties of directors and shareholders. E.g. in Delaware, only one person can act as a director, shareholder, and member of the company it is not required to other directors and members of the company resides in Delaware as well.
- There are greater privacy and anonymity in Delaware corporation; there is no need to disclose the name of the directors and members of the company publically like others.
- Delaware is a tax havenTax HavenA tax haven is a place or a country with very low or nil rate of income tax. It provides a business-friendly macroeconomic environment, such as financial and economic stability, as well as financial secrecy from tax authorities. for the company that is registered in the state of Delaware because it provides various tax advantages to those companies. For example, corporate tax is not applicable if a company registered in Delaware but doing business in another state, no royalty is chargeable on intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. or many others such types of advantages are available.
- The value of the companies which are registered in the state of Delaware is generally higher than the companies which are registered in other states.
- Registration in Delaware corporation is usually higher than the registration cost of other states.
- If the company is operating its business in other states then companies have to pay double franchise taxFranchise TaxThe franchise tax is the charges levied by the government of some US states on certain companies to run business in their states. Some organizations belonging to limited liability companies, fraternities, and non-profit organizations are exempted from this tax liability., first is the Delaware franchise tax and second is the franchise tax in the state where the company is operating the business.
- It has more paperwork as compared to others for compliance with regulations.
- Legal cost is high in the state of Delaware because companies need to higher only registered the agent to receive legal advice and for court cases also need to higher Delaware corporate lawyer.
This has been a guide to What is Delaware Corporation & its Definition. Here we discuss its types, formation, along with advantages and disadvantages. You can learn more about from the following articles –