Jan 31, 2024

The Founders’ Guide to Incorporating in Delaware in 2024

Arc Team

Go-To-Market

Delaware has long been favored for the incorporation of startups over the past few decades. It offers a business-friendly legal system, tax benefits, and established corporate precedence. However, it also comes with an elevated risk of double taxation, and potential non-compliance with local regulations. With the recent overturning of the largest compensation package in history by a Judge in Delaware, the benefits of incorporating there have been called into question. In this guide, we explore the benefits and drawbacks of incorporating in Delaware, how the incorporation works, what it costs, and more. Let’s dive in!

Notable companies incorporated in Delaware

Delaware is home to a significant number of corporations, including many Fortune 500 companies, startups, and multinational corporations. Some notable companies that are incorporated in Delaware include:

Apple: One of the world's largest technology companies, known for its iPhone, iPad, Mac, and other consumer electronics products.
Walmart: The largest retailer in the world, operating a chain of hypermarkets, discount department stores, and grocery stores.
Amazon: A multinational technology company known for its e-commerce platform, cloud computing services (Amazon Web Services), and digital streaming services.
Alphabet: A multinational conglomerate known for its search engine, advertising platform, and various other internet-related products and services.
Berkshire Hathaway: A multinational conglomerate holding company led by Warren Buffett, known for its diverse portfolio of investments in various industries, including insurance, railroads, utilities, and consumer goods.
Disney: A multinational entertainment conglomerate known for its film studios, theme parks, television networks, and media networks.
Exxon Mobil: One of the world's largest publicly traded oil and gas companies, engaged in the exploration, production, refining, and marketing of petroleum products.
General Electric: A multinational conglomerate known for its diverse portfolio of industrial products and services, including power generation, aviation, healthcare, and renewable energy.
JPMorgan Chase: One of the largest financial institutions in the United States, offering a range of financial services including investment banking, asset management, and retail banking.
Meta: A social media and technology company known for its Facebook, Instagram, WhatsApp, and Oculus VR platforms.

Benefits and Drawbacks of Incorporating in Delaware

Incorporating a startup in Delaware offers significant advantages such as a business-friendly legal system, tax benefits, and established corporate precedent. However, it also comes with drawbacks including initial complexity, potential double taxation, and compliance requirements.

Benefits

Business-Friendly Legal System: Delaware boasts a well-established legal framework tailored to business needs. Its Court of Chancery specializes in corporate law, ensuring efficient resolution of business disputes. The Delaware General Corporation Law (DGCL) offers flexibility, enabling companies to craft governance structures that suit their needs.
Tax Benefits: Delaware offers favorable tax treatment for corporations. There is no state corporate income tax for companies that do not operate within the state. Additionally, there are no personal income taxes for non-residents who receive income from Delaware corporations.
Privacy and Confidentiality: Delaware offers a high level of privacy protection for business owners. Shareholders, directors, and officers are not required to be disclosed in the formation documents, providing confidentiality, which can be advantageous for startups, especially in sensitive industries.
Established Corporate Precedent: Delaware's extensive body of corporate case law provides clarity and predictability for businesses. This established precedent offers guidance on various corporate matters, reducing ambiguity and uncertainty for startups navigating legal issues.

Drawbacks

Initial Complexity and Cost: Incorporating in Delaware involves additional administrative steps and costs compared to other jurisdictions. Startups may incur higher legal fees due to the need for specialized counsel familiar with Delaware corporate law.
Required Physical Presence: For startups located outside Delaware, managing corporate affairs may prove challenging due to geographical distance. Maintaining a physical presence in Delaware, such as a registered agent or office is required, resulting in additional expense.
Strict Compliance Requirements: Delaware imposes certain compliance obligations on corporations, such as annual franchise taxes and filing requirements. Failure to meet these obligations can result in penalties or loss of good standing, necessitating careful attention to regulatory matters.

Requirements to Incorporate in Delaware

Business Name: Select a unique name for your corporation that complies with Delaware's naming rules. The name must include the words "corporation," "incorporated," "company," or an abbreviation thereof, unless the company is a non-stock corporation.
Registered Agent: Appoint a registered agent with a physical address in Delaware who will receive legal documents and official correspondence on behalf of the corporation.
Certificate of Incorporation: Prepare and file a Certificate of Incorporation with the Delaware Division of Corporations.
Paid Filing Fee: While filing your Certificate of Incorporation, you must pay the filing fee, which varies based on the type of corporation and the number of authorized shares.
Bylaws: Draft and adopt corporate bylaws, which govern the corporation's operations and management structure.
Directors: Select initial directors who will oversee the corporation's affairs until the first shareholder meeting.
Organizational Meetings: Conduct an organizational meeting of the board of directors to approve bylaws, elect officers, and handle other initial corporate matters.
Obtain EIN: Obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) for tax purposes.
Pay Annual Franchise Tax: After incorporating, the corporation must pay annual franchise taxes to the State of Delaware. The amount is based on the corporation's authorized shares of stock and is due by March 1st each year.
File Annual Report: File an Annual Report with the Delaware Division of Corporations, providing updated information about the corporation's officers, directors, and registered agents.

Costs to incorporate a company in Delaware

The cost of incorporating a company in Delaware can vary depending on several factors, including the type of corporation, the complexity of the formation process, and whether you choose to use a registered agent or legal services. Here's a breakdown of the typical costs involved:

Filing Fee: The filing fee for the Certificate of Incorporation with the Delaware Division of Corporations typically ranges from $89 to $239, depending on the type of corporation and the number of authorized shares of stock.
Registered Agent Fee: If you choose to use a registered agent service to fulfill the requirement of having a physical address in Delaware, there will be an additional fee. Registered agent fees can vary but usually range from $50 to $300 per year, depending on the service provider and level of service.
Legal Fees: Legal fees for incorporation in Delaware can vary widely based on the complexity of the formation process and the attorney's hourly rate or flat fee structure. That said, they generally range from a few hundred to a few thousand dollars.
Annual Franchise Tax: The amount is based on the corporation's authorized shares of stock and can range from a minimum of $175 to several thousand dollars.

How long it takes to incorporate in Delaware

Incorporating a business in Delaware can typically be completed within a few weeks, but the exact timeline may vary depending on factors such as the complexity of the business structure, method of filing, and processing times at the Division of Corporations. Here's a general timeline:

Name Availability Check: Before filing for incorporation, make sure that your target business name is available and compliant with Delaware's naming requirements. This check can be done online through the Delaware Division of Corporations website and is usually instantaneous.
Preparation of Documents: Drafting and preparing the necessary incorporation documents, such as the Certificate of Incorporation and corporate bylaws, can take anywhere from a few days to a couple of weeks, depending on the complexity of the business structure and legal requirements.
Filing the Certificate of Incorporation: Once the documents are prepared, the Certificate of Incorporation is filed with the Delaware Division of Corporations. The filing process itself is relatively quick and can be done online or by mail.
Processing Time: The processing time for the Certificate of Incorporation varies depending on the method of filing and the current workload at the Division of Corporations. In general, online filings are processed faster, often within a few business days, while filings by mail may take longer, typically one to two weeks.
Receipt of Documents: Once the Certificate of Incorporation is processed and approved by the Division of Corporations, you will receive confirmation of incorporation along with a stamped copy of the filed documents. This confirmation serves as proof of incorporation.

Other popular states for startups to incorporate in

While Delaware remains a popular choice for incorporation, startups also consider other states based on their specific business needs, industry focus, and regulatory environments. Some of the notable states where startups choose to incorporate over Delaware include:

Nevada: Known for its business-friendly environment, including no corporate income tax, no personal income tax, and strong privacy protections for business owners. Nevada's relatively low regulatory burden and favorable corporate laws make it an appealing option for startups seeking to minimize taxes and compliance costs.
Wyoming: Emerging as a popular choice for startups, especially in the blockchain and cryptocurrency space, due to its progressive approach to business regulation, including blockchain-friendly laws and favorable tax treatment. Wyoming's low fees, privacy protections, and simplified regulatory requirements make it attractive for innovative startups.
Texas: Attractive for startups in various industries, including technology, energy, and healthcare, due to its pro-business environment, no state income tax, and relatively low cost of living. Texas offers robust infrastructure, access to capital, and a large talent pool, making it appealing for startups seeking growth opportunities.
Florida: Known for its favorable tax climate, including no state income tax and no corporate income tax, making it attractive for startups looking to minimize tax burdens. Florida also offers a growing ecosystem of technology startups, access to capital, and a high quality of life.
Colorado: Emerging as a hub for technology startups, particularly in the software, aerospace, and renewable energy sectors. Colorado offers a supportive entrepreneurial ecosystem, access to capital, and a skilled workforce, along with a relatively low cost of living compared to traditional tech hubs.

Tech providers that can help with incorporating in Delaware

Several technology providers offer services to streamline the process of incorporation in Delaware. These platforms provide online tools, resources, and guidance to help founders and businesses navigate the incorporation process efficiently. Some notable tech providers that can assist with incorporating in Delaware include:

LegalZoom: LegalZoom guides users through the necessary steps, including name availability checks, document preparation, filing with the Delaware Division of Corporations, and obtaining an Employer Identification Number (EIN).
Stripe Atlas: Stripe Atlas is a service provided by payment processing company Stripe that helps startups incorporate in Delaware and access a range of tools and resources to help them grow their businesses.
Firstbase: Firstbase is the simplest way for anyone to launch and run a US business. Incorporate your company, access one-click growth tools, stay compliant, and manage everything your business needs — all online, from anywhere.

Wrap-up – evaluating whether Delaware is still the best state to incorporate in

Whether Delaware is the best state to incorporate your startup depends on various factors specific to your company's needs, goals, and circumstances. While Delaware has long been a popular choice for incorporation due to its business-friendly legal environment, other states may offer advantages over Deleware depending on your priorities. Nevada and Wyoming, for example, have business-friendly legal environments, low regulatory burdens, and low filing fees. Ultimately, you should consult with legal and financial advisors to determine which state is best for you. If you're looking to incorporate in Deleware, or anywhere else for that matter, check out our partner: Firstbase. Looking to raise debt? Get in touch with us.