Top 8 Things to Know About Incorporating in Delaware

Find out what you need to know about incorporating in Delaware

Written by Rachel on April 5, 2024

Top 8 Things to Know About Incorporating in Delaware

Are you considering opening a SaaS business? Whether you are stateside or overseas, the first step in establishing a business is incorporating. As a business owner, you have a choice on where you incorporate. You no longer need to form a business in the state you reside in or where your warehouse is located.

In fact, Delaware stands out as the most popular state for incorporation, with more than 1,000,000 business entities making the state their legal tax home. Even more surprising is that more than 60% of Fortune 500 companies are incorporated in Delaware, including Amazon, CVS, and Alphabet.

Thanks for reading BillaBear SaaS Start-Up Guide! Subscribe for free to receive new posts fortnightly.

The attraction of businesses to Delaware isn’t by chance. There are numerous tax advantages, privacy shields, and benefits in place that make incorporation in Delaware appealing. In this article, we’ll cover the following 8 things you need to know about incorporating in Delaware:

Delaware Incorporation Comes with Exclusive Tax Benefits
Delaware Incorporation Offers a Greater Privacy Shield
The Incorporation Process is Simple and Quick (including steps)
Delaware Businesses Use the Court of Chancery
Delaware Registered Agents Must Reside Within the State
Ongoing Maintenance
Other State Registrations
Delaware Dissolution (including steps)

1: Delaware Incorporation Comes with Exclusive Tax Benefits

One of the primary reasons that businesses incorporate in Delaware is because of the exclusive tax benefits. Delaware has no corporate income tax, sales tax, investment income tax, inheritance tax, or personal property tax. Combined, these taxes can save businesses thousands of dollars over the course of a few years.

While there is a franchise tax to register in Delaware, this is minimal compared to the tax savings in other areas. For example, New Jersey has a corporate tax rate of 11.5%. If your business was incorporated in New Jersey, you could pay up to $11,500 in taxes on every $100,000 of taxable income compared to the $0 for businesses incorporated in Delaware.

Remember, the state taxation of your business relies on nexus and apportionment. Even if your business is incorporated in Delaware, if you made sales within another state, you might owe corporate tax in that state. As a workaround to the in-state income tax, many nationwide businesses will establish a subsidiary or shell company in Delaware that holds intangible assets.

2: Delaware Incorporation Offers a Greater Privacy Shield

Many states make owner information public, including the business address and the names of the owners or managing members. On the contrary, Delaware shields this information from public records, only displaying the name of your registered agent. Business owners who want to keep their identities private can utilize Delaware incorporation to maintain anonymity.

Since Delaware does not disclose the identities of the owners and managing members, there is no requirement to reside in Delaware to incorporate. This makes it a great state for foreign investors, officers, directors, and shareholders who might maintain residency overseas, as SaaS businesses are often fully remote.

3: The Incorporation Process is Simple and Quick

Unlike many other states that have a detailed and time-intensive application process, a Delaware incorporation is relatively simple and straightforward. Same-day business filings are normal, with the entire process taking less than one hour to complete. Here are the general steps you can expect when incorporating in Delaware:

Choose a Name – The first step in the incorporation process is choosing a name. Your name must be unique and not taken by another company. Moreover, Delaware also has rules specific to corporations and LLCs on what names you can use and the words that must be included.
Appoint Members/Managers – The next step is to list your members and managers if you are registering an LLC or your directors if you are incorporating. Corporations are required to have one or more directors, with no age or residency requirement. LLCs are also required to have one or more members or managers, with no age or residency requirements. The address of these individuals will be listed on the registration form.
Find a Registered Agent – A registered agent is an individual or a business that you appoint to receive and process important legal and tax information. Delaware requires that all LLCs and corporations have a registered agent with an address in Delaware. PO boxes are not allowed.
File Paperwork and Pay the Fee – All of the above information will need to be submitted to the state. LLCs will file a Certificate of Formation, while corporations will file a Certificate of Incorporation. Additionally, there is a fee associated with filing these forms. The minimum state fee is $89, which includes the county fee and filing fee tax. If you are using a registered agent, expect to pay more on top of the filing fee.

In certain situations, Delaware can expedite your incorporation and process your filing in as little as two hours. Quick processing time is reserved for emergency situations. The general turnaround time is a few business days.

4: Delaware Businesses Use the Court of Chancery

Delaware doesn’t follow the traditional trial system. Instead, corporate lawsuits in Delaware are handled by the Court of Chancery, which is a court made up of judges who specialize in corporate law. As a result, Delaware has well-developed and predictable legal provisions in place that benefit corporations.

For example, an average civil lawsuit can take years to resolve. However, in Delaware, cases can be handled in a few weeks because judges prioritize corporate-related cases and many cases are of similar nature, with previous rulings already in place. Furthermore, Delaware does not award punitive damages and there are no jury trials. This can be advantageous for corporations facing legal proceedings.

5: Delaware Registered Agents Must Reside Within the State

We briefly touched on registered agents. If your business is not physically located in Delaware, you might need to seek out a registered agent within the state. Your registered agent will be responsible for accepting the Service of Process and providing accurate billing and tax information to the state.

If you are located within Delaware, you can act as your own registered agent. Remember, you will need to abide by Agency Regulations and serve as the point of contact for the state. Registered agents that move outside of Delaware will need to find a new agent and update the information on file with the state.

6: Ongoing Maintenance

Like any other state, there is ongoing maintenance for your Delaware corporation or LLC. Each year, you will need to submit an annual tax report and pay franchise tax fees. These items are generally due by March 1 of each year following your incorporation.

The annual tax report applies to all businesses formed in Delaware, regardless of whether there is income derived within the state. This report will ask you to verify or update your registered agent name and address, the principal place of business, the number of shares authorized, the par value of shares, the name and addresses of all directors, and the name and address of the officer signing the report.

The franchise tax fee is also in place, regardless of your income sourced to Delaware. The franchise fee is not an income tax. It’s a payment for the right to incorporate and exist in Delaware. There is a minimum $50 filing fee in addition to the franchise tax. There are a few different ways your franchise tax is calculated, including:

Authorized Shares Method – This method bases your franchise tax on the number of authorized shares. 1 to 5,000 shares will have a fee of $175, while 5,001 to 10,000 shares will come with a fee of $250. Each additional 10,000 shares adds $85 to your franchise tax, with a cap of $200,000.
Assumed Par Value Capital Method – This method calculates franchise tax based on the value of your shares, with a minimum tax of $400 and a maximum tax of $200,000.
Large Corporate Filer – Large corporate filers, which are corporations with more than $750 million in assets or gross revenues in excess of $250 million, have an annual tax of $250,000.

The penalties for non-compliance can be stiff, with a $200 failure to file penalty. In addition, the Secretary of State will not issue a Certificate of Good Standing, which can impact your operations. If you do not file the annual report and pay the franchise tax fee for over one year, your business might be voided.

7: Other State Registrations

Incorporating in Delaware is often the first step in your registration process. If you conduct business in other states, you may need to pursue foreign qualifications in those states. LLCs and corporations are only considered domestic businesses in the state they incorporate. As a result, your business is considered a foreign company when conducting operations in other states.

Many states require foreign companies that are doing business in their state to register through a process called foreign qualification. This process is very similar to the incorporation process, requiring you to submit basic information about your company. Like Delaware, there will be ongoing maintenance, including annual report filings and fees. Here are some indicators that states use to determine if you should go through the foreign qualification process:

You have a physical presence in the state, like a warehouse. This is less common for SaaS businesses.
You have employees in the state, including remote workers and sales reps.
You accept orders in the state.
You have a bank account in the state.

Understanding your foreign qualification requirements is essential to maintain compliance when running a SaaS business. Failure to qualify a foreign LLC or corporation when you’ve been conducting business in the state can lead to fines, penalties, liability for back taxes, and loss of access to the state’s court system. The last point is crucial. If you lose your rights in the state’s court system, you are not able to defend lawsuits brought against you. It’s important to consult with a qualified attorney to determine your foreign qualification responsibilities.

8: Delaware Dissolution

Although dissolving your newly formed Delaware corporation is probably one of your last concerns, it is important to know what the process entails. Here’s the steps you need to take:

Shareholders Vote to Dissolve – You can dissolve your Delaware corporation in one of two ways: a majority vote by the board of directors or all shareholder’s consent in writing. If you only have one shareholder, it might be easier to consent to the dissolution in writing. Notice must be given to all shareholders about the vote 10 and 60 days prior to the meeting.
Pay Outstanding Franchise Fees – Before you can close your Delaware corporation, you need to be sure all franchise fees are paid. You should also be sure that your annual report filings are current.
File Certificate of Dissolution – Next, you will need to file a certificate of dissolution with Delaware. This does come with a fee. There are two form types: the short form and the standard form. Corporations can use the short form if they have no assets and stopped doing business, they have only been required to pay the minimum state franchise tax, and there is no outstanding franchise tax due. The standard form is required for corporations that don’t meet the short form criteria.
Wind Down Activities – If operations have not already begun to wind down, now is the time. Notify creditors, employees, and customers of the business closure. Any remaining assets will be distributed to shareholders. Bank accounts will be closed, state licenses will be canceled, and out-of-state registrations will need to be terminated.

If it does come time to close down your Delaware corporation, you need to be sure to work with a qualified accountant and attorney. Delaware has very specific guidelines on how businesses are dissolved.

Summary

Delaware can be a great place to incorporate your SaaS business, especially for overseas investors and entrepreneurs. However, it’s important that you fully understand what incorporating in Delaware means for your business. For more information surrounding SaaS accounting and tax tips and tricks, check out our other posts.

Sources

Latest Blog Posts