Delaware Incorporation FAQ

Delaware is the preferred state of incorporation for over 65% of Fortune 500 companies and the vast majority of venture-backed startups for several compelling reasons. First, Delaware has the most developed and predictable body of corporate law in the United States, with over 100 years of case law from the Court of Chancery, a specialized business court with judges (not juries) who are experts in corporate law. This predictability reduces legal risk and makes outcomes more foreseeable.

Second, the Delaware General Corporation Law (DGCL) is extremely flexible, allowing companies to customize governance structures, create multiple classes of stock with different rights, and adapt to changing business needs. Third, Delaware offers strong protections for directors through Section 102(b)(7), which permits companies to eliminate director personal liability for monetary damages from breaches of fiduciary duty (except for bad faith, intentional misconduct, or breach of loyalty). Fourth, investors and their attorneys are familiar with Delaware law, making fundraising smoother since standard investment documents assume Delaware incorporation. Fifth, Delaware processes corporate filings quickly, including same-day service. While Delaware franchise taxes can be significant for larger companies, the legal advantages typically outweigh the costs for growth-oriented businesses.

Delaware franchise tax is calculated using one of two methods, and corporations can choose whichever results in a lower tax. The Authorized Shares Method calculates tax based on the number of shares authorized in your certificate of incorporation: 5,000 shares or less costs $175 minimum; 5,001-10,000 shares costs $250; each additional 10,000 shares adds $85, up to a maximum of $200,000 plus the $50 annual report fee.

The Assumed Par Value Capital Method often results in lower taxes for companies with many authorized shares but limited actual capital. This method uses a formula: (total gross assets divided by total issued shares) equals assumed par value; then (authorized shares times assumed par value) divided by $1,000,000, times $400, equals the franchise tax. The minimum tax is $400 under this method. For startups with 10 million authorized shares (common for venture-backed companies) but minimal assets, the Assumed Par Value method typically results in the $400 minimum, while the Authorized Shares method would calculate over $85,000. Most companies should calculate both methods before paying. Delaware sends bills using the Authorized Shares method, often resulting in frighteningly high initial bills that can be reduced by recalculating. Use our Delaware franchise tax calculator to determine your actual obligation.

A registered agent is a person or company designated to receive official legal and government documents on behalf of your corporation, including service of process (lawsuits), tax notices, and state correspondence. Delaware law requires every corporation incorporated in Delaware to maintain a registered agent with a physical address in Delaware - a P.O. Box is not acceptable. The registered agent must be available during normal business hours to accept documents.

If you have a physical office in Delaware, an employee can serve as registered agent, but most Delaware corporations without Delaware offices use professional registered agent services. These services typically cost $50-300 annually and provide: a Delaware address for your certificate of incorporation, acceptance and forwarding of legal documents, compliance reminders for annual reports and franchise taxes, and sometimes additional services like mail forwarding. Popular registered agent providers include CT Corporation, Registered Agents Inc., Harvard Business Services, and many others. When selecting a registered agent, consider reliability, responsiveness, additional services offered, and cost. Your registered agent information is public record. If you change registered agents, you must file an amendment with the Delaware Secretary of State.

Delaware corporations must meet several annual compliance requirements to maintain good standing. The Annual Franchise Tax Report and payment are due by March 1st each year. The report requires disclosing officer and director information and paying the franchise tax calculated under either the Authorized Shares or Assumed Par Value method. Late payment incurs a $200 penalty plus 1.5% monthly interest. Failure to file for two consecutive years can result in administrative dissolution.

You must maintain a registered agent continuously - if your agent resigns, you have 30 days to appoint a new one before facing potential issues. While not required to be filed with the state, corporations must maintain proper internal records including stock ledger, meeting minutes, bylaws, and resolutions. Delaware does not require filing annual statements of information like California does, which is one administrative advantage. If your corporation does business in other states, you'll need to register as a foreign corporation in those states and comply with their requirements (like California's Statement of Information and $800 minimum franchise tax). Keep your Delaware Secretary of State records current - any changes to registered agent, officers, directors, or authorized shares require proper filings.

The Delaware Court of Chancery is a specialized court that handles business disputes, making it one of the primary reasons companies choose Delaware incorporation. Established in 1792, it is the oldest business court in the United States. Unlike regular courts, Chancery cases are decided by experienced judges called Vice Chancellors or the Chancellor, not juries, who specialize in corporate law and equity matters. This expertise leads to faster, more predictable, and more sophisticated decisions.

The court handles disputes involving corporate governance, fiduciary duties, mergers and acquisitions, shareholder rights, and contract disputes. The Chancery Court's decisions have established the foundational principles of corporate law that other states follow, including landmark cases like Smith v. Van Gorkom (duty of care), Revlon v. MacAndrews (sale of company duties), and Weinberger v. UOP (entire fairness in conflict transactions). The court can issue injunctive relief quickly, crucial in time-sensitive corporate matters like hostile takeovers. Cases move faster than traditional litigation - often reaching resolution within months rather than years. Appeals go directly to the Delaware Supreme Court. This sophisticated legal infrastructure gives businesses and investors confidence that disputes will be handled competently and efficiently.

Forming a Delaware corporation involves several steps that can be completed relatively quickly. First, choose a corporate name that includes "Corporation," "Incorporated," "Company," "Limited," or abbreviations thereof, and check availability on the Delaware Division of Corporations website. Second, prepare your Certificate of Incorporation, which must include: corporate name, registered agent name and address, statement of purpose (usually broad language like "any lawful purpose"), total number of authorized shares and par value, and incorporator name and signature.

Third, file the Certificate of Incorporation with the Delaware Secretary of State, paying the filing fee ($89 for standard processing, more for expedited). Fourth, within the first organizational meeting or by written consent, adopt bylaws, elect directors, appoint officers, authorize issuance of stock, and adopt any equity incentive plans. Fifth, issue stock certificates and maintain a stock ledger. Sixth, obtain an EIN from the IRS. The entire formation can be completed in one day with expedited filing. Many entrepreneurs use online legal services or attorneys to handle formation. After formation, if you do business in your home state, you'll likely need to register as a foreign corporation there. Initial costs include Delaware filing fee (~$89), registered agent fee (~$50-300/year), and any attorney or service fees.

C-Corps and S-Corps are both incorporated under Delaware law using the same formation process, but they differ in federal tax treatment based on an IRS election, not state law. A C-Corporation is taxed as a separate entity - the corporation pays corporate income tax on profits, and shareholders pay tax again on dividends received (double taxation). C-Corps can have unlimited shareholders, multiple classes of stock with different economic and voting rights, non-US shareholders, and entity shareholders like corporations or partnerships. This flexibility makes C-Corps the standard choice for venture-backed startups.

An S-Corporation makes an IRS election (Form 2553) to be taxed as a pass-through entity - profits and losses flow through to shareholders' personal returns, avoiding double taxation. However, S-Corps face significant restrictions: maximum 100 shareholders, only one class of stock (though voting differences are allowed), shareholders must be US citizens/residents or certain trusts, and no entity shareholders. These restrictions make S-Corps unsuitable for venture capital investment, which typically requires preferred stock and may involve non-US or entity investors. S-Corps work well for small, domestic businesses seeking pass-through taxation. Note that S-Corp status doesn't affect Delaware franchise tax, which is based on authorized shares regardless of tax election.

The business judgment rule is a cornerstone principle of Delaware corporate law that protects directors from liability for good-faith business decisions, even if those decisions turn out poorly. Under this rule, courts presume that directors acted on an informed basis, in good faith, and in the honest belief that the action was in the best interest of the corporation. If this presumption applies, courts will not second-guess business decisions or substitute their judgment for that of the board.

To receive protection, directors must: be disinterested (no personal financial interest in the transaction), be independent (no control by an interested party), act in good faith (honest belief they're acting in the company's best interest), be informed (make reasonable efforts to become informed before deciding), and not commit waste (decisions must have some rational business purpose). The protection can be lost if directors have conflicts of interest, act in bad faith, fail to exercise due care in becoming informed, or breach their duty of loyalty. When the business judgment rule doesn't apply, courts may apply entire fairness review, requiring directors to prove both fair dealing and fair price. Delaware's Section 102(b)(7) allows corporations to further protect directors by eliminating personal monetary liability for duty of care breaches, though liability for bad faith or loyalty breaches cannot be eliminated.