How to Incorporate in Delaware vs. How to Start a Delaware LLC

LLCs and corporations both provide liability protection for their owners. This means that each business entity acts as a shield between the human element and the physical business, so that if a lawsuit was to be filed, or a bankruptcy was to occur, the owners of the business are not likely to see their personal assets (cars, homes, savings, investments, etc..) to be used to pay debts. But beyond that, most people don’t entirely understand the differences between LLCs and corporations. Active Filings is about to drop some knowledge. Below you’ll find the three factors we think will help you make an informed decision on whether you want to incorporate or start a Delaware LLC.

• Ease of maintenance
  LLCs are pretty easy to maintain. An LLC can opt to be managed by its members, which allows all owners to share in the business’s day-to-day decision-making, or by managers, who can be either members or outside managers. This is helpful if members aren’t experienced in running a business and want to hire people who are. Corporations have to hold meetings, keep minutes, record votes, and generally file more paperwork compared to an LLC. However, corporations are perpetual, which means they can exist as their own entity forever, whereas an LLC will generally dissolve and cease to exist upon the resignation, death, or bankruptcy of the member or members.
• Desired tax structure
  LLC is generally organized as a pass-through entity, meaning its profits go directly to its members without being taxed by the government on the company level. Instead, they’re taxed on members’ federal income tax returns. This makes filing taxes easier than if your business were taxed on the corporate level. Corporate profits are subjected to what can be referred to as “double taxation,” which means that a corporations profits are taxed, and then you get hit with taxes at the personal income level. The Wyoming LLC is where it’s at on tax structure.
• Investors
  If you plan to raise capital for your business, then incorporation probably makes the most sense. Investors prefer the favorable taxation rules of a corporations, and unlike LLCs, a corporation’s shareholders are not taxed on company profits unless profits are distributed. This means the dividends paid from the corporation can be structured to take advantage of the best tax scenario for the shareholders. LLCs If you plan to grow your small business into a larger entity and attract investors, forming a corporation is your best bet.

Note that whether you form an LLC or a corporation, you’ll need to file a Beneficial Ownership Information (BOI) Report with the Financial Crimes Enforcement Network (FinCEN) once your company is officially formed with the state of Delaware. This report provides the federal government with identifying information about your company and those with the most control over profits and business operations. However, unlike state filings, the information shared in your report does not go on the public record and there is no filing fee. (Though if you don’t want to file this on your own, we offer BOI filing service for just $25.)

A final thought on LLCs and corporations. While the local florist down the street is a fine upstanding company, their LLC just doesn’t have the prestige of a Nike, Inc or a Walmart, Inc. When you hear the word corporation, many people think of big multi-national companies with tons of resources at their disposal. While the LLC is perfect for the small to medium-sized business, the words Limited Liability Company (LLC) doesn’t carry the same weight as the corporation. While LLCs first came into being in the late 1970s, the corporation is the oldest recognized business entity in the US, and thus they carry with them an aura of prestige.

While we’ve already broken down the differences between an LLC and a corporation, we’re going to dig a bit deeper into the pros and cons of forming an Delaware LLC or corporation. Take a look below to see what makes Delaware LLCs and corporations unique:

• Low to No Taxes
  Delaware LLCs taxed as S corps, and LLCs in Delaware that do no business in Delaware, don’t pay state income taxes. Residents of other states and other countries may be obligated to pay their home state’s income taxes, but they will not have to pay Delaware’s income tax. Delaware also does not impose a sales tax, which is good for both businesses and consumers, and streamlines costs and costs of goods. Gallon of paint, $25 on the shelf? You won’t have to calculate how much it will cost at checkout. Pretty sweet.
• No Annual Report for LLCs
  Delaware LLCs do not file an annual report. Instead LLCs in Delaware must pay an what is called an Alternative Entity Tax. This tax is a flat, annual fee of $300. Though it costs you $300, LLCs won’t have to worry about meeting filing dates for annual reports, just sign up online and pay the fee. Easy.
• Anonymity
  A Delaware LLC filed through a professional Registered Agent (hey, we know some folks who are professional registered agents) offers an LLC and it’s member(s) the highest level of confidentiality. When filed properly, only the company name and the name and address of the registered agent typically appear on Delaware’s Certificate of Formation, along with the date of filing and the company file number. This means that forming an LLC in Delaware gives you an extra layer of protection from possible lawsuits or anyone else who wants to pierce the corporate veil.
• Delaware Court of Chancery
  More than 50% of publicly traded companies in the US and more than 65% of Fortune 500 companies are incorporated in Delaware. One of the reasons for Delaware’s popularity as a harbor for business entities is it’s Court of Chancery. Established in 1792, the Court of Chancery allows companies to resolve disputes quickly with a judge rather than a jury. Judges for the Court of Chancery specialize in corporate law, draw on hundreds of years of legal precedent, and hear only business-related cases. Why is this good for small businesses? Because any legal dispute your company may have has likely already been argued in court, so businesses usually know ahead of time whether to fight a lawsuit or settle.

To form your Delaware corporation, you’ll need to file a Certificate of Incorporation with Delaware’s Division of Corporations. You can file the document online or by mail. The Certificate of Incorporation costs a minimum of $109 to file. Filing out your corporation’s Certificate of Incorporation isn’t super difficult, but by hiring a registered agent service like Active Filings, you can rest assured that the entire process will be easy and efficient, and all of your personal information (names, addresses, email, etc…) will be replaced with ours, which means you’ll get an added layer of protection from junk mail, sales calls, and even worse, lawsuits.

You’ll form your LLC by filing your Certificate of Organization with the the Delaware Division of Corporations. You can file the document online or by mail, $110. If you hire Active Filings, we can do all of this for you.

Your Certificate of Incorporation must include the following details:

What is the Delaware Annual Report?
Delaware doesn’t really have an annual report, or not one that you would find in most states. Instead it levies a state franchise tax.

Delaware’s “Franchise Tax” is the fee imposed by the state of Delaware for the privilege to own a Delaware company and do business within the state. The tax has no bearing on income or company activity. It is based on your corporation type and the number of authorized shares your company has. The total cost of the Franchise Tax is comprised of an annual report fee and the actual tax due, though a non-stock/non-profit company is considered exempt from the tax, just an annual report fee of $25/year.

How do I file my Annual report? 

Delaware requires all annual reports and franchise taxes to be submitted online.

To file online you’ll need to go to the state website.
You’ll go to Delaware’s Annual Report/Franchise Tax page.
Enter your 7 digit Business Entity File Number. Forgot your number? You can find it by searching the Delaware Corporations Database.
All Delaware domestic corporations must file an annual report and pay a franchise tax.

There are two methods you can use to calculate your franchise tax. The state encourages you to choose the method that results in the lesser tax; however, the total will never be less than $175.

Two Methods to Calculate Franchise Tax for a Maximum Stock Company
Authorized Shares Method

The state of Delaware uses this method to initially calculate your taxes. This method is calculated based on the number of authorized shares. The calculation is as follows:

5,000 shares or less: $175
5,001 – 10,000 shares: $250
Additional 10,000 shares or portion thereof: add $85
The maximum annual tax is $200,000
Also you must add the $50 annual report fee to the Franchise Tax after it is calculated.

Assumed Par Value Capital Method

The state of Delaware allows you to pay the lower of the two calculation methods. Therefore, if you receive a bill from Delaware for tens of thousands of dollars, it may be in your best interest to try calculating your Franchise Tax with the assumed par value capital method.

In order to utilize this filing method, you will need to provide the company’s total gross assets (as reported on the Form 1120, Schedule L) and the total number of issued shares. Many times the tax is then calculated to the minimum payment of $400 Franchise Tax plus the $50 annual report fee.
A corporation with 5,000 authorized shares or less is considered a minimum stock corporation. The annual report fee is $50 and the tax is $175 for a total of $225 per year.

A corporation with 5,001 authorized shares or more is considered a maximum stock corporation. The annual report fee is $50 and the tax would be somewhere between $200 and $200,000 per year.

When are Delaware Annual reports due?
Corporation reports/taxes are due March 1st.
LLCs are due June 1st.

Paying taxes is like going to the dentist. No one wants to do it. Taxes are, however, an integral part of successfully doing business in America. While we’re not tax professionals, we definitely will do our best to try and explain what kind of taxes your business will be expected to pay.

How will my corporation be taxed?
Corporations face “double taxation.” First they pay taxes on net profits from the business, and then get hit a second time when taxed on the dividends they receive from those earnings. Dividends are taxed at the shareholder’s personal tax rate. An LLC doesn’t have this problem, which means anyone looking to form a corporation should take note of a state’s corporate income tax and personal income tax.

How will my LLC be taxed?
Single member LLCs, meaning it’s just you running your business, are treated like sole proprietorships by the IRS. This means that any profits or losses your LLC experiences, will pass-through to you as the single owner. All you have to do is file a Schedule C with your personal tax return (IRS Form 1040).

What if my LLC has more than one member?
As with a single member LLC, the IRS will view your multi-member LLC as a partnership. The LLC will retain it’s pass-through tax status, with a few wrinkles with regards to paperwork. Instead of one member filing a 1040, instead each member will have to file a Return of Partnership Income form (IRS Form 1065). This document lets the IRS check and make sure each owner is reporting their income properly. Beyond that, each LLC owner will attach a Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.) to their Form 1040. This form shows the IRS each member’s share of the LLC’s profits and losses.

Here’s a tip: If your LLC is going to have more than one member, it would be a good idea to draw up a simple operating agreement. Most states don’t require an LLC to have one, but with so many cooks in the kitchen, you’ll want clear documentation with regards to ownership percentage, voting rights, distribution of profits and losses, as well as rules for buying out a member. You won’t be require to file the agreement, but it should be signed by each member and kept with the LLC’s important documents.

Beyond the basic information you’ll also need:
• payroll documents
• bank and credit card statements
• accounting documents
• partnership agreements
• depreciation schedules
• gross receipts
• checking and savings account interest

What tax forms do I need to file?
Corporations: Form 1100
LLCs: Form 200-01 and 200-02 for non resident

What’s the Delaware corporate tax income rate?
8.7%

Delaware also levies a Gross Receipts Tax. This is a tax on the total gross revenues of a business, regardless of their source. This tax is levied on the seller of goods or services, rather than on the consumer. Gross receipts tax rates currently range from .0945% to .7468%. Most Delaware businesses are entitled to an exclusion of the tax, which varies depending on the business activity conducted. These exclusions, provided monthly or quarterly, generally start at $100,000 per month and can be as high as $1,250,000. You can find your tax rate here.

What’s the personal income tax rate?
$0 – $2,000                   0.00%
$2,000 – $5,000            2.20%
$5,000 – $10,000         3.90%
$10,000 – $20,000       4.80%
$20,000 – $25,000       5.20%
$25,000 – $60,000       5.55%
$60,000+                      6.60%

When are my business tax returns due?
Corporate income tax returns are due by April 15th (or by the 15th day of the 4th month following the end of the taxable year for fiscal year filers). Individual income tax returns are due by April 30th.

What if I need an extension?
Delaware offers a 6-month extension for corporations, which moves the filing deadline to October 15th (for calendar year taxpayers). For partnerships, a Delaware extension will cover the same period of time as the Federal extension (IRS Form 7004), for which the extended deadline is September 15th. C corporations should use Form 1100-EXT to request a Delaware extension. S corporations should use Form 1100S-EXT to request a Delaware extension. Partnerships must file a copy of their approved Federal tax extension with the Delaware Division of Revenue in order to obtain a state extension. Your Delaware extension request must be filed by the original deadline of your return.