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If you want expert assistance to form a Delaware corporation, limited liability company, or other business entity, you have come to the right place. Delaware Corporations LLC will guide you every step of the way to form your Delaware organization quickly and efficiently.
Unlike most other corporate service companies, we offer formation services in Delaware only. We don’t claim expertise in 50 states, but…
We Know Delaware!
We have designed our web site so that you can order a Delaware corporation or limited liability company online. In most cases, we will have your organizational certificates filed with the Delaware Secretary of State by the next business day after we receive your order. However, if you don’t like filling out forms, or if you have any questions, please call us at 302-652-7580 and we will take your order over the phone. Or you can send us an e-mail. Our knowledgeable, friendly staff is looking forward to hearing from you.
Just Getting Started?
Keep reading to learn more about registering your company with us in the great state of Delaware.
Need Legal Advice?
Our staff members are not lawyers and they do not give legal advice. However, if you have a legal question, our staff can arrange for you to speak to a lawyer with the Wilmington, Delaware law firm of Smith, Katzenstein & Jenkins, LLP.
State Facts:
- The “First State” having ratified the constitution in 1787.
- Least populated state and 2nd smallest in size.
- Majority of NYSE / Fortune 500 companies registered here.
Why Delaware?
For over a century, Delaware has been the home for America’s premier corporations. More than half of the Fortune 500 are incorporated in Delaware. They do so because we in Delaware care about their business — and yours.
Delaware’s laws governing corporations, limited liability companies, limited partnerships and business trusts are arguably the most advanced and flexible laws in the nation.
Jurisdiction over most questions arising under Delaware’s corporation, limited liability company, and limited partnership laws is vested in the Delaware Court of Chancery. The Court of Chancery has over 200 years of legal precedent in corporation and business entity law.
The Delaware State Legislature take seriously its role in keeping the corporation, limited liability company and limited partnership laws current.
Advantages of Organizing in Delaware
- Delaware is the recognized leader in corporate, limited liability and limited partnership law.
- You can form a Delaware corporation, limited liability company, or business entity without coming to Delaware.
- The owners and operators of a Delaware corporation or limited liability company are not required to be identified in the public records of the State.
- One person can be the sole director and officer of a corporation or sole member and manager of a limited liability company.
- Delaware has a minimal corporate franchise tax (as low as $175.00 per year) that is not based upon income.
- There is no Delaware income tax for Delaware corporations or limited liability companies that do not do business in Delaware.
Did you know? Over half of Fortune 500 companies and 60% of the NYSE businesses are registered in Delaware!
State Facts:
- The “First State” having ratified the constitution in 1787.
- Least populated state and 2nd smallest in size.
- Majority of NYSE / Fortune 500 companies registered here.
Why use Delaware Corporations LLC?
- We know Delaware!
- We are experienced, friendly, and reasonably priced.
- Easy ordering by Phone, Fax, Email or Online.
- Quick Turnaround – we get started the same day.
- Verified Merchant helps secure online transactions.
- Accredited by the Better Business Bureau with A+ Rating.
Frequently Asked Questions
Have another question? Give us a call at (302) 652-7580 or email us at [email protected]
Why should I choose Delaware Corporations LLC to form my Delaware business entity?
We know Delaware. We are experienced, friendly, and reasonably priced.
You can form a Delaware corporation or limited liability company online, by phone, by fax, or by mail. Limited partnerships and business trusts can be formed by phone. We will check the availability of the name you have selected for your new business entity the same day.
Our staff members are not lawyers and they do not give legal advice. However, if you have a legal question, our staff can arrange for you to speak to an attorney with the Smith, Katzenstein & Jenkins LLP law firm.
Does the corporation have to do business in Delaware?
No. The corporate offices may be located anywhere in the world, as long as the corporation maintains a registered agent in Delaware.
Does the limited liability company have to do business in Delaware?
No. The limited liability company’s offices may be located anywhere in the world, as long as the limited liability company maintains a registered agent in Delaware.
What is the fee for having Delaware Corporations LLC serve as registered agent?
Our fee for serving as registered agent is only $99 per calendar year. Our registered agent fee is subject to change. However, we will give you at least 3 months’ notice in advance of any change.
What franchise tax does a corporation pay to Delaware?
The minimum annual franchise tax for a corporation with up to 5,000 shares of no par or $.01 par common stock is $175.00, plus a filing fee of $50.00. If the corporation does not conduct business in Delaware, that is the only tax paid to Delaware.
What franchise tax does a limited liability company pay to Delaware?
The annual tax for a limited liability company is $300.00 If the limited liability company does not conduct business in Delaware, that is the only tax paid to Delaware.
What does a registered agent do?
All business entities registered in Delaware must retain a registered agent with a street address in Delaware. This address serves as your “registered office”. The registered agent will accept Service of Process and legal correspondence received for the business entity if the company is sued.
A registered agent will forward correspondence received from the Delaware Secretary of State. The Delaware Secretary of State will send a company’s annual franchise tax notice to the registered agent office. The registered agent then forwards that bill to the company, for payment to the Delaware Secretary of State.
Can my company use Delaware Corporations LLC’s address to receive mail?
Our address may not be used as the company’s business address (the business operations do not take place at our office). However, we do offer a mail forwarding service if needed for an additional fee. This service allows use of our P.O. Box address. Please contact us for additional information.
Learn More about Delaware Corporations
Delaware Corporations LLC, in conjunction with the law firm of Smith, Katzenstein & Jenkins LLP, is pleased to provide this basic guide to the different ways a business may be organized under Delaware law. This information is provided as a public service, contains general descriptions not necessarily applicable in all circumstances and does not and should not be viewed as legal or tax advice. Persons desiring to form a business entity should first consult with an attorney or other business advisor.
Table of Contents
Introduction
As society grows more complex, demands on business expand. State and federal laws and regulations affecting business multiply, giving rise to ever increasing risks of liability and loss unrelated to the economic performance of a business. The legal form in which a business operates has become more crucial than ever.
The choice of entity has itself grown more complex. Principal choices now include: sole proprietorship; general partnership; limited liability partnership; limited partnership; limited liability limited partnership; limited liability company; business trust; stock corporation; membership corporation; Subchapter S corporation; close corporation; and professional corporation. Each has its advantages and disadvantages. Each is designed to address certain business problems.
Whether starting a new business, expanding an existing business, or pursuing a strategic alliance or joint venture, selection of the proper form in which to conduct business can contribute significantly to achieving the goals of the enterprise. It can also minimize conflict among participants and reduce or eliminate risk of personal liability.
An informed choice of entity is a part of prudent business planning. To assist such planning, in the following pages we briefly describe the principal forms of business entities. These descriptions are not a substitute, of course, for consultation with your business advisers. Rather, they are intended to provide information that will assist you in working with your business advisers to select the type of entity that best meets your needs.
Types of Delaware Business Entities
Sole Proprietorship
The simplest form of business enterprise is a sole proprietorship. The business is conducted by an individual after obtaining the necessary licenses, permits and other documents necessary to commence business. If conducted under a trade name, a “fictitious name filing” is required to notify the public of the use of a trade name by the sole proprietor. Because there are no formation or operational formalities, a sole proprietorship is very simple to start, operate and to terminate. A sole proprietorship does not involve the creation of a legal entity separate from the proprietor. As a result, the sole proprietor is personally liable for all debts and obligations of the business and there is no continuity of business in the event of disability or death. The only way to transfer ownership of the business is through a sale of the assets used in the business.
Corporation
Probably the most commonly used and best understood form of business entity, a corporation is an entity formed under state or federal law. It is separate and distinct from its owners, and may acquire, hold, and dispose of property, conduct its business, and sue or be sued in its own name. The relative rights and duties of the corporation, its owners, and its management are largely defined by statute and by the corporation’s certificate of incorporation and bylaws.
Most corporations are organized as stock Corporations and issue stock to evidence ownership. Under appropriate circumstances, a corporation may be formed as a nonstock, membership corporation. Stockholders in small corporations often chose to enter into a stockholders’ agreement to regulate the voting and transfer of stock in order to better protect their investment.
As a separate entity, a corporation is liable for its debts and other obligations. Except under unusual circumstances, stockholders, directors and officers of a corporation are not personally liable for the corporation’s obligations.
Management of a corporation generally rests with its board of directors, who are elected by the stockholders. Other than the right to elect directors and approve certain transactions, such as mergers, sale of all assets, and dissolution, stockholders have no role in managing a corporation. When formed as a statutory “close corporation,” management may be vested in the stockholders in lieu of a board of directors.
Delaware corporations:
- Have no minimum capital requirement
- Do not require a principal place of business in Delaware
- Allow one person to be the sole director, officer and stockholder
- Have no residency requirement for directors, officers or stockholders
A special type of corporation, known as the “professional corporation,” exists for licensed professionals, such as doctors, architects, accountants, and attorneys, who by law or ethical rules may not practice in the form of a regular corporation. The salient features of the professional corporation are that only licensed professionals may be stockholders, each stockholder participates as a director in the management of the business, and each stockholder remains personally liable for his or her own professional negligence or malpractice and that of any other stockholder, employee or agent working under the stockholder’s supervision and control.
General Partnership
A general partnership is simply an association of two or more persons to carry on a business as co-owners. No formalities are required to create a general partnership. Thus, a general partnership may arise out of the conduct and actions of the parties, or pursuant to an oral agreement. It is prudent, however, to use a written agreement that specifies the respective rights and duties of the partners. Where no agreement exists, the Revised Uniform Partnership Act provides some rules for the creation, operation, dissolution and termination of a general partnership, but it is not a good substitute for an agreement.
The distinguishing features of a general partnership are that each partner is an agent for the partnership with the power to legally bind the partnership and each partner is personally liable for the debts and obligations of the partnership. Most business decisions may be made by a majority of the partners, although some matters, such as admission of a new partner, will require unanimous agreement.
For non-tax purposes, a Delaware general partnership is a separate entity from its partners, may conduct business, acquire, hold, and dispose of property, and sue and be sued in its name, without the need to join all partners as parties.
Limited Liability Partnership
Delaware authorizes a special form of general partnership known as a limited liability partnership. In a limited liability partnership, the partnership is required to register with the Delaware Secretary of State and maintain a specified amount of liability insurance. In return, partners are relieved of personal liability for obligations of the partnership. Partners remain personally liable for their own negligence or misconduct and that of persons under their direct supervision and control. The limited liability partnership is attractive to professionals who want the benefits of the partnership form but without the personal liability for the professional misconduct of other partners and employees.
Limited Partnership
A limited partnership is a special form of partnership created by the filing of a certificate of limited partnership with the Delaware Secretary of State pursuant to statutory requirements. The relation among partners is governed primarily by a partnership agreement. While the agreement may be oral, use of a written agreement is almost always advisable. The Revised Uniform Limited Partnership Act provides some rules regulating the relative rights of partners and the management, dissolution and termination of a limited partnership. Because such statutory rules may, in most cases, be altered by agreement among the partners, to obtain maximum benefits from the limited partnership form requires a written partnership agreement tailored to specific circumstances.
Like a corporation, a limited partnership is a separate legal entity from its partners. A limited partnership must have at least one general partner and at least one limited partner. The principal distinguishing feature of a limited partnership is that the limited partners are not personally liable for the debts and obligations of the partnership. The general partner remains fully liable. Thus, limited partners risk only their invested capital.
Historically, the price for limited liability was that limited partners could have no participation in management of the partnership, which was vested entirely in the general partner. Delaware’s current limited partnership laws provide great flexibility in this area, however, and it is possible to structure a limited partnership agreement that gives considerable management participation to limited partners without jeopardizing their limited liability.
Without loss of limited liability, limited partners may:
- Transact business with the limited partnership
- Be a control person of a general partner
- Consult with and advise the general partner
- Serve on a committee of limited partners
- Vote on matters such as dissolution, a sale of assets, a merger, and admission or removal of a general partner
Limited partnerships may become limited liability limited partnerships, and thereby provide the general partner with the same protection from personal liability afforded general partners in a limited liability partnership.
Limited Liability Company
A limited liability company is one of the more recent and most flexible business structures available in Delaware. Formed by filing a certificate of formation with the Delaware Secretary of State, a limited liability company is a separate legal entity having the power to conduct business, acquire, hold and dispose of property, and sue or be sued in its own name. A limited liability company may have as few as one member. Management may be by the members or by selected managers who may or may not be members themselves. As with limited partnerships, the relation among members and the management structure are typically set forth in a written limited liability company agreement. A limited liability company agreement may provide for various classes of members and managers and their respective rights, powers and duties and it may also set forth the manner of allocation of profits and losses of a limited liability company to its members. Principal attributes of a limited liability company include: (i) any member or manager may bind a limited liability company, (ii) except in certain limited situations, no member or manager is personally liable for the debts or obligations of a limited liability company, and (iii) perpetual existence. The foregoing may be changed by express provision in the limited liability company agreement.
Delaware Statutory Trust
A Delaware statutory trust, another extremely flexible business structure, is an unincorporated association created by a trust instrument and the filing with the Secretary of State of Delaware of a certificate of trust. A governing instrument, which includes the trust instrument, provides for the governance of the statutory trust and the conduct of its business. A governing instrument may provide for various classes of trustees and beneficial owners and define their respective rights, powers, and duties. A statutory trust has perpetual existence. It is managed by one or more named trustees who are not liable for the obligations of the statutory trust. The beneficial owners have the same insulation from liability as shareholders of a corporation, have an undivided beneficial interest in the statutory trust’s property, and have no interest in specific statutory trust property. However, the governing instrument may alter any of these attributes. In most cases, at least one trustee must be either a Delaware resident or have a principal place of business in Delaware.
Joint Venture
From a strict legal view, a joint venture is simply a general partnership formed to pursue a single business venture that is limited in scope and duration. Today, however, the term joint venture is commonly used to describe a business venture undertaken by two or more existing businesses seeking to combine their resources to exploit a particular aspect of their respective businesses. Such a joint venture may take any form except that of a sole proprietorship, and commonly is organized as a corporation, partnership, limited partnership or limited liability company.
Some General Business Concerns
Management and Control
The owners’ desire to have centralized or decentralized management will greatly influence the decision as to the appropriate business structure. In general terms, centralized management means that the owners of the enterprise relinquish control over management to one or a group of persons. Where decentralized management exists, the owners of the enterprise retain management authority.
As a general rule, corporations and limited partnerships provide for centralized management through the board of directors of the corporation or the general partner of the limited partnership. By contrast, general partnerships typically have decentralized management, with all partners participating in management. Limited liability companies and statutory trusts may, depending on the terms of their organizational documents, provide for either centralized or decentralized management.
Personal Liability
Depending on the business structure chosen, the owners of a business will have varying degrees of liability for the obligations of their business.
A corporation, limited partnership, limited liability company, or statutory trust generally provides limited liability. Thus, unless obligated through a separate agreement, such as a personal guarantee, a stockholder, limited partner, member, or beneficial owner has no personal liability for the debts and obligations of the entity.
By contrast, both a sole proprietor and a general partner of either a general or limited partnership has unlimited personal liability to third parties. A general partner may obtain some protection by causing the partnership to become a limited liability partnership (or a limited liability limited partnership in the case of a limited partnership). In such case, the general partner will be personally liable only for debts arising from the partner’s own negligence, wrongful acts or misconduct, and that of persons under the general partner’s direct supervision and control.
Tax Treatment
The tax treatment accorded to a form of entity almost always plays a critical role in deciding whether the form of entity is suited for a particular business venture.
Corporations are taxed as separate entities and pay their own corporate taxes, including income taxes. Profits distributed to stockholders by way of dividends are taxed a second time as income to the stockholder. Small business corporations often qualify for a special tax status, referred to as Subchapter S status. A Subchapter S corporation generally pays no income tax at the corporate level. Rather, all corporate income is attributed to and taxed to the stockholders, whether or not actually distributed to them.
By contrast, a sole proprietorship, because it is not a separate legal entity, is not taxed separately. All profits and losses are attributed to the owner and must be figured into the owner’s overall tax situation.
General partnerships, registered limited liability partnerships and limited partnerships are known as pass through entities for tax purposes. Rather than being taxed at the entity level, profits and losses are passed through to the partners and allocated to them in proportion to their ownership interests. As a consequence, partnership income is taxed as a part of a partner’s income at the tax rate applicable to the partner. In limited partnerships, the ability of a limited partner to deduct losses is usually restricted by special limitations on the deduction of losses.
A limited liability company may be taxed either as a corporation or a partnership, depending on its structure. Similarly, a statutory trust may be structured so that it is taxed either as a corporation, a partnership, or a trust.
Citizens of countries other than the United States are often concerned with the tax consequences of owning an entity such as a limited liability company. A Delaware LLC that (1) carries on no business in the U.S., (2) derives no income from any sources within the U.S. and (3) has not elected to be treated for tax purposes as a corporation does not need to file a U.S. tax return or a Delaware tax return.
Under the current IRS “check-the-box” rules, a Delaware LLC that does not affirmatively elect to be treated for tax purposes as a corporation will be treated for federal tax purposes as a partnership. It will be treated as a partnership for Delaware tax purposes as well.
Under current Treasury Regulations, a partnership that carries on no business in the U.S. and derives no income from any source within the U.S. does not need to file a tax return. Delaware law currently provides that a partnership need file a return only if it has income from sources within the State of Delaware.
If the LLC has only one member, then for federal tax purposes the LLC is disregarded, and the sole member is taxed as a sole proprietor. Current Treasury Regulations provide that a nonresident alien who is not engaged in a U.S. business and who does not derive any income from any source within the U.S. does not have to file a tax return. Similarly, Delaware law currently provides that a nonresident alien having no income from sources within the State of Delaware does not have to file a Delaware return.
Regulatory Compliance
By law, certain types of businesses, primarily banking and insurance, may be conducted only in corporate form subject to regulation by state or federal authorities. For many professionals, such as physicians or architects, the type of business entity may be restricted by statute or by professional rules of ethics.
No matter what form of business entity is chosen, some registration will be required, ranging from a fictitious name certificate for the sole proprietorship or general partnership to the appropriate filing with the Secretary of State to create a corporation, registered limited liability partnership, limited partnership, limited liability company, or statutory trust. All necessary business licenses must be obtained, as well as a federal tax identification number. Where multistate business will be conducted, the entity may have to qualify to do business in states other than the state in which the entity is organized. For a limited liability company or statutory trust, this may be a concern if it wishes to do business in a state that does not recognize the particular form of entity.
Most investments in a business involve the offer or sale of a security. Consequently, where more than one person invests in an enterprise, whether by way of a capital contribution or a loan, attention must be given to compliance with both federal and state laws and regulations governing the offer and sale of securities.
Why Choose Delaware?
Almost 60% of the Fortune 500 companies are incorporated in Delaware, and for good reasons. Delaware’s business laws, courts, and governmental services make Delaware an ideal place to organize.
Delaware offers:
- Advanced, flexible business laws
- Courts highly sophisticated in business and commercial law
- Cooperative, friendly governmental agencies
Delaware’s business entity laws are among the most advanced and flexible statutes in America. They are designed to provide maximum flexibility in the structuring of business entities and the allocation of rights and duties among owners and managers.
The Delaware courts, and in particular the Delaware Chancery Court, are renown for their expertise in corporate and other business law. That expertise, gained over two centuries of deciding important corporate and business matters, has resulted in a wealth of decisions that make Delaware law highly predictable, thereby facilitating planning and reducing the need for litigation. The Delaware courts frequently handle significant cases on an expedited basis when time is critical to the litigants. Delaware’s recently enacted Summary Proceedings Act offers a unique procedure to resolve major commercial disputes on an expedited schedule with special rules to minimize the burden and expense of litigation.
Finally, the Delaware Secretary of State’s Office, through its Division of Corporations administers filings for Corporations limited partnerships, registered limited liability partnerships, limited liability companies and business trusts. It also assesses and collects annual fees and taxes and registers all foreign business entities doing business in Delaware. Equipped with the most modern technology, the Division of Corporations can accept for filing original, facsimile or electronically transmitted documents. Storage of documents on optical disks permits both the Division of Corporations and authorized on-line users to retrieve documents and information easily and quickly. One hour, two hour, same-day and 24-hour service is available from the Division of Corporations.
With modern, flexible business entity statutes, highly respected courts, well-developed case law, and a cooperative and efficient Division of Corporations, Delaware offers an unparalleled environment in which to organize business entities.
Foreign Owned LLCs
Read the Tax Treatment section under Choosing Your Delaware Business Entity regarding federal and state tax treatment of LLC’s owned by non-residents or “foreign” entities.
Schedule of Franchise Tax
Corporate Franchise Tax
All corporations incorporated in the State of Delaware are required to file an Annual Franchise Tax report and to pay a franchise tax. Religious and charitable non-stock corporations are exempt from the tax but must file an annual report. Taxes and annual reports are to be received no later than March 1st of each year. The minimum tax is $175.00 with a maximum tax of $200,000.00. Taxpayers owing more that $5,000.00 pay taxes in quarterly installments with 40% due June 1, 20% due by September 1, 20% due by December 1, and the remainder due March 1.
Corporate Annual Report
Annual reports for corporations are sent to the registered agents in December of each year. A $50.00 filing fee is required for the annual report. Annual reports or reprints may be requested through your registered agent. Calculations for Franchise Tax due are done using the Authorized Share Method on the annual report.
LP/LLC/GP
All Limited Partnerships, Limited Liability Companies and General Partnerships formed in the State of Delaware are required to pay an annual tax of $300.00. Taxes for these entities are to be received no later that June 1st of each year.
HOW TO CALCULATE FRANCHISE TAXES
All corporations formed in the State of Delaware are required to file an Annual Report and to pay a franchise tax. The Annual Report filing fee for all domestic corporations is $50.00. Taxes and Annual Reports are to be received no later than March 1st of each year. The minimum tax is $175.00 with a maximum tax of $200,000.00. Taxpayers owing $5,000.00 or more make estimated payments with 40% due June 1st, 20% due by September 1st, 20% due by December 1st, and the remainder due March 1st.
The Annual Franchise Tax is calculated based on the authorized shares method. Use the method that results in the lesser tax. The total tax will never be less than $175.00 or more than $200,000.00.
Authorized Shares Method
For corporations having no par value stock the authorized shares method will always result in the lesser tax.
- 5,000 shares or less (minimum tax) $175.00
- 5,001 – 10,000 shares – $250.00
- each additional 10,000 shares or portion thereof add $75.00
- maximum yearly tax is $200,000.00
For Example
A corporation with 10,005 shares authorized pays $325.00 ($250.00 plus $75.00)
A corporation with 100,000 shares authorized pays $925.00 ($250.00 plus $675.00[$75.00 x 9])
Assumed Par Value Capital Method
To use this method, you must give figures for all issued shares(including treasury shares) and total gross assets in the spaces provided in your Annual Franchise Tax Report. Total Gross Assets shall be those “total assets” reported on the U.S. Form 1120, Schedule L (Federal Return) relative to the company’s fiscal year ending the calendar year of the report. The tax rate under this method is $350.00 per million or portion of a million. If the assumed par value capital is less than $1,000,000, the tax is calculated by dividing the assumed par value capital by $1,000,000 then multiplying that result by $350.00.
The example cited below is for a corporation having 1,000,000 shares of stock with a par value of $1.00 and 250,000 shares of stock with a par value of $5.00 , gross assets of $1,000,000.00 and issued shares totaling 485,000.
- Divide your total gross assets by your total issuedshares carrying to 6 decimal places. The result is your “assumed par”.Example: $1,000,000 assets, 485,000 issued shares = $2.061856 assumed par.
- Multiply the assumed par by the number ofauthorized shares having a par value of less than the assumed par.Example: $2.061856 assumed par s 1,000,000 shares = $2,061,856.
- Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value.Example: 250,000 shares s $5.00 par value = $1,250,000
- Add the results of #2 and #3 above. The result is your assumed par value capital.Example: $2,061,856 plus 1,250,000 = $3,311 956 assumed par value capital.
- Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000, by 1,000,000 and then multiply by $350.00.Example: 4 x $350.00 = $1,400.00
NOTE: If an amendment changing your stock or par value was filed with the Division of Corporations during the year, issued shares and total gross assets within 30 days of the amendment must be given for each portion of the year during which each distinct authorized amount of capital stock or par value was in effect. The tax is then prorated for each portion of the year dividing the number of days the stock/par value was in effect by 365 days (366 leap year), then multiplying this result by the tax calculated for that portion of the year. The total tax for the year is the sum of all the prorated taxes for each portion of the year.
You may also use the State of Delaware’s Franchise Tax Calculator for estimating your taxes.
Conclusion
Embarking on a business venture involves many critical decisions. The form of entity in which to conduct the enterprise ranks among the most important. Careful thought at the outset should result in the selection of a form of organization that not only best suits the needs of the business and its owners, but by its inherent attributes contributes to the success and growth of the enterprise.
Quick Reference Guide
| Type of Entry | Filing Required | Separate Entity From Owners? | Personal Liability | Centralized or Decentralized Management? | Taxed as Separate Entity? | Min # of Investors |
|---|---|---|---|---|---|---|
| Sole Proprietor | No | No | Yes | Centralized | No | 1 |
| Corporation | Yes | Yes | No | Centralized | Yes | 1 |
| S Corporation | Yes | Yes | No | Centralized | No | 1 |
| Close Corporation1 | Yes | Yes | No | Either | Yes | 1 |
| Professional Corporation1 | Yes | Yes | Yes | Centralized | Yes | 1 |
| Partnership | No | Yes | Yes | Either | No | 2 |
| Limited Liability Partnership | Yes | Yes | _2 | Either | No | 2 |
| Limited Partnership | Yes | Yes | No3 | Centralized | No | 24 |
| Limited Liability Company | Yes | Yes | No | Either | _5 | 1 |
| Business Trust | Yes | Yes | No | Centralized | _6 | 17 |
| Joint Venture | No | No | Yes | Either | No | 2 |
- Close and professional corporation may elect S Corporation for federal tax purposes.
- Partners remain liable for their own negligence or willful misconduct.
- General partner remains liable for partnership obligations; limited partners not liable.
- Advanced techniques do exist to structure limited partnership with only one investor.
- Generally can elect to be taxed as a corporation or as a partnership.
- Generally can elect to be taxed as a corporation or as a partnership.
- A trustee is required in addition to the investor.
Table of Contents
Introduction
As society grows more complex, demands on business expand. State and federal laws and regulations affecting business multiply, giving rise to ever increasing risks of liability and loss unrelated to the economic performance of a business. The legal form in which a business operates has become more crucial than ever.
The choice of entity has itself grown more complex. Principal choices now include: sole proprietorship; general partnership; limited liability partnership; limited partnership; limited liability limited partnership; limited liability company; business trust; stock corporation; membership corporation; Subchapter S corporation; close corporation; and professional corporation. Each has its advantages and disadvantages. Each is designed to address certain business problems.
Whether starting a new business, expanding an existing business, or pursuing a strategic alliance or joint venture, selection of the proper form in which to conduct business can contribute significantly to achieving the goals of the enterprise. It can also minimize conflict among participants and reduce or eliminate risk of personal liability.
An informed choice of entity is a part of prudent business planning. To assist such planning, in the following pages we briefly describe the principal forms of business entities. These descriptions are not a substitute, of course, for consultation with your business advisers. Rather, they are intended to provide information that will assist you in working with your business advisers to select the type of entity that best meets your needs.
Types of Delaware Business Entities
- Sole Proprietorship
- Corporation
- General Partnership
- Limited Liability
- Partnership
- Limited Partnership
- Limited Liability
- Company
- Delaware Statutory Trust
- Joint Venture
Sole Proprietorship
The simplest form of business enterprise is a sole proprietorship. The business is conducted by an individual after obtaining the necessary licenses, permits and other documents necessary to commence business. If conducted under a trade name, a “fictitious name filing” is required to notify the public of the use of a trade name by the sole proprietor. Because there are no formation or operational formalities, a sole proprietorship is very simple to start, operate and to terminate. A sole proprietorship does not involve the creation of a legal entity separate from the proprietor. As a result, the sole proprietor is personally liable for all debts and obligations of the business and there is no continuity of business in the event of disability or death. The only way to transfer ownership of the business is through a sale of the assets used in the business.
Corporation
Probably the most commonly used and best understood form of business entity, a corporation is an entity formed under state or federal law. It is separate and distinct from its owners, and may acquire, hold, and dispose of property, conduct its business, and sue or be sued in its own name. The relative rights and duties of the corporation, its owners, and its management are largely defined by statute and by the corporation’s certificate of incorporation and bylaws.
Most corporations are organized as stock Corporations and issue stock to evidence ownership. Under appropriate circumstances, a corporation may be formed as a nonstock, membership corporation. Stockholders in small corporations often chose to enter into a stockholders’ agreement to regulate the voting and transfer of stock in order to better protect their investment.
As a separate entity, a corporation is liable for its debts and other obligations. Except under unusual circumstances, stockholders, directors and officers of a corporation are not personally liable for the corporation’s obligations.
Management of a corporation generally rests with its board of directors, who are elected by the stockholders. Other than the right to elect directors and approve certain transactions, such as mergers, sale of all assets, and dissolution, stockholders have no role in managing a corporation. When formed as a statutory “close corporation,” management may be vested in the stockholders in lieu of a board of directors.
Delaware corporations:
- Have no minimum capital requirement
- Do not require a principal place of business in Delaware
- Allow one person to be the sole director, officer and stockholder
- Have no residency requirement for directors, officers or stockholders
A special type of corporation, known as the “professional corporation,” exists for licensed professionals, such as doctors, architects, accountants, and attorneys, who by law or ethical rules may not practice in the form of a regular corporation. The salient features of the professional corporation are that only licensed professionals may be stockholders, each stockholder participates as a director in the management of the business, and each stockholder remains personally liable for his or her own professional negligence or malpractice and that of any other stockholder, employee or agent working under the stockholder’s supervision and control.
General Partnership
A general partnership is simply an association of two or more persons to carry on a business as co-owners. No formalities are required to create a general partnership. Thus, a general partnership may arise out of the conduct and actions of the parties, or pursuant to an oral agreement. It is prudent, however, to use a written agreement that specifies the respective rights and duties of the partners. Where no agreement exists, the Revised Uniform Partnership Act provides some rules for the creation, operation, dissolution and termination of a general partnership, but it is not a good substitute for an agreement.
The distinguishing features of a general partnership are that each partner is an agent for the partnership with the power to legally bind the partnership and each partner is personally liable for the debts and obligations of the partnership. Most business decisions may be made by a majority of the partners, although some matters, such as admission of a new partner, will require unanimous agreement.
For non-tax purposes, a Delaware general partnership is a separate entity from its partners, may conduct business, acquire, hold, and dispose of property, and sue and be sued in its name, without the need to join all partners as parties.
Limited Liability Partnership
Delaware authorizes a special form of general partnership known as a limited liability partnership. In a limited liability partnership, the partnership is required to register with the Delaware Secretary of State and maintain a specified amount of liability insurance. In return, partners are relieved of personal liability for obligations of the partnership. Partners remain personally liable for their own negligence or misconduct and that of persons under their direct supervision and control. The limited liability partnership is attractive to professionals who want the benefits of the partnership form but without the personal liability for the professional misconduct of other partners and employees.
Limited Partnership
A limited partnership is a special form of partnership created by the filing of a certificate of limited partnership with the Delaware Secretary of State pursuant to statutory requirements. The relation among partners is governed primarily by a partnership agreement. While the agreement may be oral, use of a written agreement is almost always advisable. The Revised Uniform Limited Partnership Act provides some rules regulating the relative rights of partners and the management, dissolution and termination of a limited partnership. Because such statutory rules may, in most cases, be altered by agreement among the partners, to obtain maximum benefits from the limited partnership form requires a written partnership agreement tailored to specific circumstances.
Like a corporation, a limited partnership is a separate legal entity from its partners. A limited partnership must have at least one general partner and at least one limited partner. The principal distinguishing feature of a limited partnership is that the limited partners are not personally liable for the debts and obligations of the partnership. The general partner remains fully liable. Thus, limited partners risk only their invested capital.
Historically, the price for limited liability was that limited partners could have no participation in management of the partnership, which was vested entirely in the general partner. Delaware’s current limited partnership laws provide great flexibility in this area, however, and it is possible to structure a limited partnership agreement that gives considerable management participation to limited partners without jeopardizing their limited liability.
Without loss of limited liability, limited partners may:
- Transact business with the limited partnership
- Be a control person of a general partner
- Consult with and advise the general partner
- Serve on a committee of limited partners
- Vote on matters such as dissolution, a sale of assets, a merger, and admission or removal of a general partner
Limited partnerships may become limited liability limited partnerships, and thereby provide the general partner with the same protection from personal liability afforded general partners in a limited liability partnership.
Limited Liability Company
A limited liability company is one of the more recent and most flexible business structures available in Delaware. Formed by filing a certificate of formation with the Delaware Secretary of State, a limited liability company is a separate legal entity having the power to conduct business, acquire, hold and dispose of property, and sue or be sued in its own name. A limited liability company may have as few as one member. Management may be by the members or by selected managers who may or may not be members themselves. As with limited partnerships, the relation among members and the management structure are typically set forth in a written limited liability company agreement. A limited liability company agreement may provide for various classes of members and managers and their respective rights, powers and duties and it may also set forth the manner of allocation of profits and losses of a limited liability company to its members. Principal attributes of a limited liability company include: (i) any member or manager may bind a limited liability company, (ii) except in certain limited situations, no member or manager is personally liable for the debts or obligations of a limited liability company, and (iii) perpetual existence. The foregoing may be changed by express provision in the limited liability company agreement.
Delaware Statutory Trust
A Delaware statutory trust, another extremely flexible business structure, is an unincorporated association created by a trust instrument and the filing with the Secretary of State of Delaware of a certificate of trust. A governing instrument, which includes the trust instrument, provides for the governance of the statutory trust and the conduct of its business. A governing instrument may provide for various classes of trustees and beneficial owners and define their respective rights, powers, and duties. A statutory trust has perpetual existence. It is managed by one or more named trustees who are not liable for the obligations of the statutory trust. The beneficial owners have the same insulation from liability as shareholders of a corporation, have an undivided beneficial interest in the statutory trust’s property, and have no interest in specific statutory trust property. However, the governing instrument may alter any of these attributes. In most cases, at least one trustee must be either a Delaware resident or have a principal place of business in Delaware.
Joint Venture
From a strict legal view, a joint venture is simply a general partnership formed to pursue a single business venture that is limited in scope and duration. Today, however, the term joint venture is commonly used to describe a business venture undertaken by two or more existing businesses seeking to combine their resources to exploit a particular aspect of their respective businesses. Such a joint venture may take any form except that of a sole proprietorship, and commonly is organized as a corporation, partnership, limited partnership or limited liability company.
Some General Business Concerns
- Management and Control
- Personal Liability
- Tax Treatment
- Regulatory Compliance
While there are always many areas of concern in selecting the proper form of entity, among the forefront are issues of management and control, personal liability, tax treatment, and regulatory compliance. It is the balancing of all such concerns that ultimately determines the best form of business entity for a given venture.
Management and Control
The owners’ desire to have centralized or decentralized management will greatly influence the decision as to the appropriate business structure. In general terms, centralized management means that the owners of the enterprise relinquish control over management to one or a group of persons. Where decentralized management exists, the owners of the enterprise retain management authority.
As a general rule, corporations and limited partnerships provide for centralized management through the board of directors of the corporation or the general partner of the limited partnership. By contrast, general partnerships typically have decentralized management, with all partners participating in management. Limited liability companies and statutory trusts may, depending on the terms of their organizational documents, provide for either centralized or decentralized management.
Personal Liability
Depending on the business structure chosen, the owners of a business will have varying degrees of liability for the obligations of their business.
A corporation, limited partnership, limited liability company, or statutory trust generally provides limited liability. Thus, unless obligated through a separate agreement, such as a personal guarantee, a stockholder, limited partner, member, or beneficial owner has no personal liability for the debts and obligations of the entity.
By contrast, both a sole proprietor and a general partner of either a general or limited partnership has unlimited personal liability to third parties. A general partner may obtain some protection by causing the partnership to become a limited liability partnership (or a limited liability limited partnership in the case of a limited partnership). In such case, the general partner will be personally liable only for debts arising from the partner’s own negligence, wrongful acts or misconduct, and that of persons under the general partner’s direct supervision and control.
Tax Treatment
The tax treatment accorded to a form of entity almost always plays a critical role in deciding whether the form of entity is suited for a particular business venture.
Corporations are taxed as separate entities and pay their own corporate taxes, including income taxes. Profits distributed to stockholders by way of dividends are taxed a second time as income to the stockholder. Small business corporations often qualify for a special tax status, referred to as Subchapter S status. A Subchapter S corporation generally pays no income tax at the corporate level. Rather, all corporate income is attributed to and taxed to the stockholders, whether or not actually distributed to them.
By contrast, a sole proprietorship, because it is not a separate legal entity, is not taxed separately. All profits and losses are attributed to the owner and must be figured into the owner’s overall tax situation.
General partnerships, registered limited liability partnerships and limited partnerships are known as pass through entities for tax purposes. Rather than being taxed at the entity level, profits and losses are passed through to the partners and allocated to them in proportion to their ownership interests. As a consequence, partnership income is taxed as a part of a partner’s income at the tax rate applicable to the partner. In limited partnerships, the ability of a limited partner to deduct losses is usually restricted by special limitations on the deduction of losses.
A limited liability company may be taxed either as a corporation or a partnership, depending on its structure. Similarly, a statutory trust may be structured so that it is taxed either as a corporation, a partnership, or a trust.
Citizens of countries other than the United States are often concerned with the tax consequences of owning an entity such as a limited liability company. A Delaware LLC that (1) carries on no business in the U.S., (2) derives no income from any sources within the U.S. and (3) has not elected to be treated for tax purposes as a corporation does not need to file a U.S. tax return or a Delaware tax return.
Under the current IRS “check-the-box” rules, a Delaware LLC that does not affirmatively elect to be treated for tax purposes as a corporation will be treated for federal tax purposes as a partnership. It will be treated as a partnership for Delaware tax purposes as well.
Under current Treasury Regulations, a partnership that carries on no business in the U.S. and derives no income from any source within the U.S. does not need to file a tax return. Delaware law currently provides that a partnership need file a return only if it has income from sources within the State of Delaware.
If the LLC has only one member, then for federal tax purposes the LLC is disregarded, and the sole member is taxed as a sole proprietor. Current Treasury Regulations provide that a nonresident alien who is not engaged in a U.S. business and who does not derive any income from any source within the U.S. does not have to file a tax return. Similarly, Delaware law currently provides that a nonresident alien having no income from sources within the State of Delaware does not have to file a Delaware return.
Regulatory Compliance
By law, certain types of businesses, primarily banking and insurance, may be conducted only in corporate form subject to regulation by state or federal authorities. For many professionals, such as physicians or architects, the type of business entity may be restricted by statute or by professional rules of ethics.
No matter what form of business entity is chosen, some registration will be required, ranging from a fictitious name certificate for the sole proprietorship or general partnership to the appropriate filing with the Secretary of State to create a corporation, registered limited liability partnership, limited partnership, limited liability company, or statutory trust. All necessary business licenses must be obtained, as well as a federal tax identification number. Where multistate business will be conducted, the entity may have to qualify to do business in states other than the state in which the entity is organized. For a limited liability company or statutory trust, this may be a concern if it wishes to do business in a state that does not recognize the particular form of entity.
Most investments in a business involve the offer or sale of a security. Consequently, where more than one person invests in an enterprise, whether by way of a capital contribution or a loan, attention must be given to compliance with both federal and state laws and regulations governing the offer and sale of securities.
Why Choose Delaware?
Almost 60% of the Fortune 500 companies are incorporated in Delaware, and for good reasons. Delaware’s business laws, courts, and governmental services make Delaware an ideal place to organize.
Delaware offers:
- Advanced, flexible business laws
- Courts highly sophisticated in business and commercial law
- Cooperative, friendly governmental agencies
Delaware’s business entity laws are among the most advanced and flexible statutes in America. They are designed to provide maximum flexibility in the structuring of business entities and the allocation of rights and duties among owners and managers.
The Delaware courts, and in particular the Delaware Chancery Court, are renown for their expertise in corporate and other business law. That expertise, gained over two centuries of deciding important corporate and business matters, has resulted in a wealth of decisions that make Delaware law highly predictable, thereby facilitating planning and reducing the need for litigation. The Delaware courts frequently handle significant cases on an expedited basis when time is critical to the litigants. Delaware’s recently enacted Summary Proceedings Act offers a unique procedure to resolve major commercial disputes on an expedited schedule with special rules to minimize the burden and expense of litigation.
Finally, the Delaware Secretary of State’s Office, through its Division of Corporations administers filings for Corporations limited partnerships, registered limited liability partnerships, limited liability companies and business trusts. It also assesses and collects annual fees and taxes and registers all foreign business entities doing business in Delaware. Equipped with the most modern technology, the Division of Corporations can accept for filing original, facsimile or electronically transmitted documents. Storage of documents on optical disks permits both the Division of Corporations and authorized on-line users to retrieve documents and information easily and quickly. One hour, two hour, same-day and 24-hour service is available from the Division of Corporations.
With modern, flexible business entity statutes, highly respected courts, well-developed case law, and a cooperative and efficient Division of Corporations, Delaware offers an unparalleled environment in which to organize business entities.
Foreign Owned LLCs
Read the Tax Treatment section under Choosing Your Delaware Business Entity regarding federal and state tax treatment of LLC’s owned by non-residents or “foreign” entities.
Schedule of Franchise Tax
Corporate Franchise Tax
All corporations incorporated in the State of Delaware are required to file an Annual Franchise Tax report and to pay a franchise tax. Religious and charitable non-stock corporations are exempt from the tax but must file an annual report. Taxes and annual reports are to be received no later than March 1st of each year. The minimum tax is $175.00 with a maximum tax of $200,000.00. Taxpayers owing more that $5,000.00 pay taxes in quarterly installments with 40% due June 1, 20% due by September 1, 20% due by December 1, and the remainder due March 1.
Corporate Annual Report
Annual reports for corporations are sent to the registered agents in December of each year. A $50.00 filing fee is required for the annual report. Annual reports or reprints may be requested through your registered agent. Calculations for Franchise Tax due are done using the Authorized Share Method on the annual report.
LP/LLC/GP
All Limited Partnerships, Limited Liability Companies and General Partnerships formed in the State of Delaware are required to pay an annual tax of $300.00. Taxes for these entities are to be received no later that June 1st of each year.
HOW TO CALCULATE FRANCHISE TAXES
All corporations formed in the State of Delaware are required to file an Annual Report and to pay a franchise tax. The Annual Report filing fee for all domestic corporations is $50.00. Taxes and Annual Reports are to be received no later than March 1st of each year. The minimum tax is $175.00 with a maximum tax of $200,000.00. Taxpayers owing $5,000.00 or more make estimated payments with 40% due June 1st, 20% due by September 1st, 20% due by December 1st, and the remainder due March 1st.
The Annual Franchise Tax is calculated based on the authorized shares method. Use the method that results in the lesser tax. The total tax will never be less than $175.00 or more than $200,000.00.
Authorized Shares Method
For corporations having no par value stock the authorized shares method will always result in the lesser tax.
- 5,000 shares or less (minimum tax) $175.00
- 5,001 – 10,000 shares – $250.00
- each additional 10,000 shares or portion thereof add $75.00
- maximum yearly tax is $200,000.00
For Example
A corporation with 10,005 shares authorized pays $325.00 ($250.00 plus $75.00)
A corporation with 100,000 shares authorized pays $925.00 ($250.00 plus $675.00[$75.00 x 9])
Assumed Par Value Capital Method
To use this method, you must give figures for all issued shares(including treasury shares) and total gross assets in the spaces provided in your Annual Franchise Tax Report. Total Gross Assets shall be those “total assets” reported on the U.S. Form 1120, Schedule L (Federal Return) relative to the company’s fiscal year ending the calendar year of the report. The tax rate under this method is $350.00 per million or portion of a million. If the assumed par value capital is less than $1,000,000, the tax is calculated by dividing the assumed par value capital by $1,000,000 then multiplying that result by $350.00.
The example cited below is for a corporation having 1,000,000 shares of stock with a par value of $1.00 and 250,000 shares of stock with a par value of $5.00 , gross assets of $1,000,000.00 and issued shares totaling 485,000.
- Divide your total gross assets by your total issuedshares carrying to 6 decimal places. The result is your “assumed par”.Example: $1,000,000 assets, 485,000 issued shares = $2.061856 assumed par.
- Multiply the assumed par by the number ofauthorized shares having a par value of less than the assumed par.Example: $2.061856 assumed par s 1,000,000 shares = $2,061,856.
- Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value.Example: 250,000 shares s $5.00 par value = $1,250,000
- Add the results of #2 and #3 above. The result is your assumed par value capital.Example: $2,061,856 plus 1,250,000 = $3,311 956 assumed par value capital.
- Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000, by 1,000,000 and then multiply by $350.00.Example: 4 x $350.00 = $1,400.00
NOTE: If an amendment changing your stock or par value was filed with the Division of Corporations during the year, issued shares and total gross assets within 30 days of the amendment must be given for each portion of the year during which each distinct authorized amount of capital stock or par value was in effect. The tax is then prorated for each portion of the year dividing the number of days the stock/par value was in effect by 365 days (366 leap year), then multiplying this result by the tax calculated for that portion of the year. The total tax for the year is the sum of all the prorated taxes for each portion of the year.
You may also use the State of Delaware’s Franchise Tax Calculator for estimating your taxes.
Conclusion
Embarking on a business venture involves many critical decisions. The form of entity in which to conduct the enterprise ranks among the most important. Careful thought at the outset should result in the selection of a form of organization that not only best suits the needs of the business and its owners, but by its inherent attributes contributes to the success and growth of the enterprise.
Quick Reference Guide
| Type of Entry | Filing Required | Separate Entity From Owners? | Personal Liability | Centralized or Decentralized Management? | Taxed as Separate Entity? | Min # of Investors |
|---|---|---|---|---|---|---|
| Sole Proprietor | No | No | Yes | Centralized | No | 1 |
| Corporation | Yes | Yes | No | Centralized | Yes | 1 |
| S Corporation | Yes | Yes | No | Centralized | No | 1 |
| Close Corporation1 | Yes | Yes | No | Either | Yes | 1 |
| Professional Corporation1 | Yes | Yes | Yes | Centralized | Yes | 1 |
| Partnership | No | Yes | Yes | Either | No | 2 |
| Limited Liability Partnership | Yes | Yes | _2 | Either | No | 2 |
| Limited Partnership | Yes | Yes | No3 | Centralized | No | 24 |
| Limited Liability Company | Yes | Yes | No | Either | _5 | 1 |
| Business Trust | Yes | Yes | No | Centralized | _6 | 17 |
| Joint Venture | No | No | Yes | Either | No | 2 |
- Close and professional corporation may elect S Corporation for federal tax purposes.
- Partners remain liable for their own negligence or willful misconduct.
- General partner remains liable for partnership obligations; limited partners not liable.
- Advanced techniques do exist to structure limited partnership with only one investor.
- Generally can elect to be taxed as a corporation or as a partnership.
- Generally can elect to be taxed as a corporation or as a partnership.
- A trustee is required in addition to the investor.
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