Delaware has long been a preferred destination for entrepreneurs and businesses looking to incorporate. Known for its business-friendly environment, well-established legal framework, and the Delaware Court of Chancery specializing in corporate law, the state offers numerous advantages for corporations. This article will guide you through the process of forming a new corporation in Delaware.
Step 1. Check name availability with the Delaware Division of Corporations.The first step in forming a corporation in Delaware is selecting a unique and distinguishable name for your business entity. Your chosen name must include one of the following words or abbreviations: “Corporation,” “Incorporated,” “Company,” or “Limited.” Ensure the name is not already in use and check its availability on the Delaware Division of Corporations’ website.
Step 2. (Optional but recommended if the company uses its name as a trademark): Check to see if the name is available as a trademark with the USPTO. Some of my clients have had to change their company name because it was used as a brand by another company.
Step 3. Get a registered agent. Delaware requires every corporation to have a registered agent with a physical address within the state who can receive legal documents and official correspondence on behalf of the company. You can hire a registered agent service or designate an individual or yourself as the registered agent.
Step 4. Prepare and File the Certificate of Incorporation. The Certificate of Incorporation, also known as the Articles of Incorporation in some states, is the formal document that establishes your corporation in Delaware. You can fill out the certificate online through the Delaware Division of Corporations website or use a paper form. Key information to include:
- Corporation name and address
- Registered agent’s name and address
- Names and addresses of initial directors
- Authorized stock information (number of shares and par value, if applicable)
Delaware offers flexibility in structuring your corporation. You can choose to form a C Corporation, which is subject to double taxation but offers more flexibility, or an S Corporation, which passes income through to shareholders, avoiding double taxation. Carefully consider the tax implications and consult with a tax professional to make an informed decision.
Step 5. Draft Corporate Bylaws. Corporate bylaws are internal documents that outline the rules and procedures for your corporation’s governance. While Delaware law does not require you to file bylaws with the state, they are crucial for defining roles, responsibilities, and decision-making processes within your corporation. Consult an attorney to help draft comprehensive bylaws tailored to your specific needs.
Step 6. Hold an Organizational Meeting
After filing the Certificate of Incorporation and drafting the bylaws, it’s essential to hold an organizational meeting of the initial directors and shareholders. During this meeting, you will:
- Elect officers and appoint key executives.
- Adopt the bylaws.
- Issue stock certificates to shareholders.
- Discuss and record important decisions regarding the corporation’s operation.
Step 7. Founders enter into restricted stock purchase agreements (“RSPAs”) with the company to purchase shares at par, the idea being that at the time of incorporation, the value of the company is equal to the par value of the shares. The amount that founders pay for stock is very small, totaling less than $1,000, but it is important to ensure that the founders actually give this money to the company and that it is deposited into their bank account. company and accounting. given in the book. The company will then issue a receipt for the funds received from the founders.
Step 8. If the founder’s stock is vested, the founder must file a Form 83(b) election with the IRS. They only have 30 days to do so from the date of the RSPA. No extensions. Failure to do so on time can result in severe tax consequences for the founder.
Step 9. The founders enter into a technology transfer agreement with the company, which, as of the date of RSPA, transfers to the company all intellectual property that they developed for the company before its founding. This is also a very important step. Step 10. Final agreement. Along with RSPA and technology transfer agreements, founders sign invention transfer and confidentiality agreements stipulating that all intellectual property they develop on behalf of the company now belongs to the company. There may be exceptions. For example, all inventions unrelated to company operations, developed without the use of company facilities or equipment outside of business hours, belong to the individual employee and not to the employee. about business. This is the case for all California corporations (even if they are DE corporations), and this exception is widely used in other states as well.
Step 11. Obtain an EIN and Comply with Tax Requirements. Apply for an Employer Identification Number (EIN) from the IRS. This unique identifier is necessary for federal tax purposes, opening bank accounts, and hiring employees. Delaware also imposes an annual franchise tax on corporations, the calculation of which depends on your company’s authorized shares and gross assets. Ensure you stay compliant with these tax obligations.
Step 12. Open a bank account.
Step 13. Certify the company’s eligibility to do business in the state of origin (assuming the company is not located in Delaware).
Step. 14. Register for State Business Licenses and Permits
Depending on your corporation’s activities, you may need to obtain various state and local business licenses and permits. Research the specific requirements and deadlines, and submit the necessary applications.
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Forming a corporation in Delaware offers numerous advantages, but it is essential to follow the proper steps and stay compliant with state and federal regulations. Seek professional guidance from attorneys, tax experts, and business consultants to ensure your corporation’s smooth establishment and ongoing operation in the First State. With careful planning and adherence to legal requirements, your Delaware corporation can thrive and benefit from the state’s business-friendly environment.
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