Delaware is a popular choice for organizing corporations and limited liability companies (LLCs), both large and small. Among the reasons for this, it has (i) relatively simple and inexpensive organizing documents and procedures; (ii) relatively low annual fees and franchise taxes, (iii) relatively simple compliance forms/procedures, (iv) an excellent and efficient registration authority, and (v) an excellent/well-developed corporate law and legal system. Most importantly, you will not be subject to Delaware corporate or LLC income taxes if you don’t operate your business in that state and, in the case of LLCs, none of the members of the LLC is a Delaware resident.
The Principal Corporate Legislation is the Delaware General Corporate Law of 1989. Normally every company has its own by-laws as part of its corporate documentation. The language of legislation and corporate documentation is English. If any other language is used it must be accompanied by a translation in English.
The companies used for trade and investment are Corporations and Limited Liability Companies (LLCs). Delaware introduced the legislation on LLCs in 1992, and later other States and the District of Columbia (except Hawaii, Vermont, Massachusetts and Pennsylvania) officially recognised this type of Company.
Incorporation procedure depends on the type of company:
• Corporations: The Articles of Incorporation or Certificate of Incorporation are filed with the Secretary of State in the preferred state of incorporation.
• LLCs: The Articles of Organization or Certificate of Formation are filed with the Secretary of State in the preferred state of formation.
A registered office is required, and it must be maintained in the State of Delaware at the office of a professional registered agent. The data on the incorporated office are indicated in the Certificate of Incorporation. Off-the-shelf Companies are available.
Company names are subject to the following requirements:
• The name can be in any language, though English translation is recommended.
• The following restrictions apply:
For Corporations: Any name that is identical or similar to that of an existing company within the state of incorporation. Additionally, the use of the words “bank” or “trust” in the name of a corporation is prohibited in all 50 states unless prior consent is obtained from the banking authorities in the state of incorporation.
For LLCs: Any name that is identical or similar to that of an existing company within the state of formation. Additionally, the use of the words “bank”, “trust”, “insurance” or “reinsurance” in the name of an LLC is generally prohibited in all 50 states. This is because limited liability companies in most states are simply not allowed to engage in the banking or insurance business.
• The suffixes denoting limited liability are usually as follows:
For Corporations: Incorporated, Corporation, Limited, Company or the abbreviations Inc, Corp, or Ltd.
For LLCs: Limited Liability Company and Limited Company or the abbreviations LLC or LC.
• The following words, and associated activities, are not permitted: Bank, Trust, University, College or School.
The following requirements apply to Company Management structure:
• Corporations: The minimum number of directors is one, and he or she must be a natural person. The director cannot be a corporate body. The director may be of any nationality and need not be a citizen of the United States. The Director can be appointed to several positions: Company President, Vice President, Secretary and Treasurer. The Body of Directors has the right to adopt, amend and change the by-law norms, determine the share capital and issue shares.
• LLCs: There must be one manager at least, either a natural person or a body corporate of any nationality.
• Corporations: The minimum number of shareholders is one. A shareholder of a US Corporation may be another corporation (even an international or “offshore” corporation).
• LLCs: The minimum number of members is two. This ensures automatic tax classification as a partnership.
There are no requirements as to the minimum amount of authorised share capital. If there is no share capital, it is possible to issue shares without par value. Provided the minimum Franchise Tax is being paid, it is possible to issue 3000 shares without par value. Bearer shares are not permitted.
Annual Taxation and Fees
There is no tax on turnover in Delaware. According to the Delaware State Constitution, the administration of the State cannot require Companies incorporated in Delaware but actually domiciled and conducting business elsewhere to pay income tax. The only mandatory payment is that of the Franchise Tax and Filing Fee, which depends on the share capital. Only a corporation whose business is officially conducted on US territory pays the American Federal Tax on Corporations. Non-resident Shareholders are exempted from Withholding Tax on dividends, including tax on inherited shares.
An LLC structured for partnership tax treatment with non-resident members that conduct no business in Delaware is generally not subject to the state income tax and is not required to file a state income tax return. A US LLC which does not conduct business in the US and does not have a source of income in the USA is not subject to the US federal income tax and is not required to file a US income tax return.
The following requirements apply to financial statements for both Corporations and LLCs:
A Franchise Tax report must be completed each year showing details of the officers of the corporation, however there is generally no requirement to file financial statements with the state of formation unless the corporation owns assets within that state or has conducted business there.
Delaware annual compliance
All Delaware corporations are required to file an annual report/franchise tax assessment form on or before March 1 of the year following the last day of the year (December 31), which is the subject of the report. The following information must be reported: (i) the names/addresses of the officers and directors and (ii) a brief description of the corporation’s business. The report must be signed by an officer or director. There is no requirement to disclose stockholder identities. For corporations with a small amount of authorized capital stock,, the annual franchise tax is $35.00. The annual report fee in all cases is an additional $25.00 (there are substantial penalties for missing the March 1 filing/payment deadline, however).
Delaware does not require the disclosure of LLC managers or members in any public document. In fact, these kinds of issues are normally taken care of by the members as part of an operating agreement. Instead of an annual report/franchise tax assessment form, the state issues an annual LLC Tax Form—the tax assessed must be paid on or before the 1st of June following the end of the year for which payment is being made. Please note that disclosure of stockholders/managers/members may be required, depending on the circumstances, in connection with income tax filings with the IRS or the relevant state tax authority, but there is no public access to these filings.
What are the relative advantages/disadvantages of corporations and limited liability companies?
As discussed above, both corporations and limited liability companies afford their owners (stockholders in the case of corporations; members in the case of LLCs) limited liability protection, i.e., the owners of the relevant entity are typically not personally responsible for the debts and liabilities of its business.
The primary difference between corporations and LLCs is that corporations are separate taxpaying entities while LLCs are normally taxed as partnerships. This means that a traditional corporation (a “C Corporation”) is subject to a corporate income tax and its stockholders are subject to an additional tax when they receive dividends (“Double Taxation”). In an LLC, there is no separate tax at the company level and the members are taxed directly on the company’s profits (“Pass-through-Taxation”). A C Corporation can avoid Double Taxation by electing Pass-through-Taxation (S Corporation status), and thereby attain tax treatment similar to that of an LLC. It should be noted, however, that S Corporations may not have more than 75 stockholders, and none of these may be a corporation or a non-resident alien. Furthermore, a corporation’s S Corporation status will lapse (and cause the corporation to revert to (C Corporation status) immediately upon such corporation’s failure to comply with any of these or other restrictions.
A corporation is required to follow certain formalities. For example, a corporation must hold an annual meeting of shareholders and meeting minutes must be kept with the corporation’s records. LLCs are not required to hold such meetings; however, it is a good idea to document the company’s major decisions and hold regular meetings of members.
Ordinarily, corporations must have directors who are responsible for making policy decisions and officers who are responsible for the day-to-day operations. LLCs may be configured more flexibly. By way of example, an LLC may have one or more managers running the company or the members may manage the LLC directly; no officers or directors are required
If your business is ever likely to go public, it will have to be as a corporation. It should be noted that an LLC should be able to convert to a corporation prior to going public without major tax consequences.