Introduction to Delaware Corporation
Delaware Corporation can be defined as those companies which have legal registration of conducting business in the state of Delaware in the US and may also conduct its business in any state. This law was adopted by the late 19th century when Delaware was in the phase of changing the laws to attract business from outside states too especially giving competition to New York where major businesses were conducted.
Delaware corporations are very famous in the US because of the business-friendly laws which they are subjected too and almost half of the Standard & Poor’s 500 rated are present in the state of Delaware. Finance companies to be specific are very popular here because of the higher charge of interest on loans which they charge from their customers and Delaware corporations are allowed to do so. Delaware corporation rules give the lenders greater freedom to charge higher interest on loans.
Types of Delaware Corporation
The different types of Delaware corporations are as follows:
1. Limited Liability Company
A Delaware LLC is formed by registering with the specific Certificate of Formation with Delaware Secretary of State. These corporations have very low start-up fees and a friendly tax rate. This kind of set up offers the owners or members protection of their assets against any kind of liability or creditors which means members are not responsible for a liability which is more than the initial investment one has put into the LLC.
2. Limited Partnership
A Delaware Limited partnership firm is one that includes more than one member or partner to the firm. General partner’s duties include general management function and one or more members should be the ones who will not participate in the management function, who are termed as limited partners. In order to conduct business, one has to obtain a Certificate of limited partnership from the Delaware Division of Corporations. General partners are responsible or liable for any financial obligations of the firm whereas limited partners have no liability towards the firm’s debt or obligations.
Delaware S-corporation is the entity that doesn’t pay federal taxes. An S-Corp needs to firm form a Delaware general or close corporation and then file for Form 2553 with the IRS. The IRS on approval won’t tax such a corporation but the tax liability will be passed to each shareholder in accord to their proportionate ownership with the company.
4. Non-Profit Corporation
The firm needs to form first a Delaware nonstock business firm. These businesses have no shareholders and are owned by a limited set of members and are non-profit firms. Members may have both voting and non-voting rights. Members can join either by paying annual fees or some firms may have a strict set of rules and criteria for joining such firms. The non-stock firm after this has to file with IRS to gain a non-profit status by furnishing form 1023.
5. General Corporation
This is also called C-Corp and is generally formed when the company plans to go public or plans for an IPO. This corporation is formed to lure in venture capital investments. The shareholders are the owners of the company but they don’t contribute to managing the company.
6. Close Corporation
A Delaware close corporation is the one where shareholders, management, directors, officers are the same people and they are organized into a small closed group. A closed corporation cannot have more than 30 shareholders. The closed corporation operates with all legal protection which a corporation enjoys.
7. Public Benefit Corporation
The public benefit company makes it a mandatory part to act ethically with regards to the society and environment. The company is formed in the same way a Delaware corporation is formed, just that it has to ensure that it is acting for the common public benefit.
Structure of Delaware Corporation
The Delaware Corporation primarily has 3 levels or tiers:
- Shareholders: They are generally considered to be the owners of the firm and are responsible for all major decisions. They are the ones who own the shares of the corporation. These shareholders have power to common stock of the company and have voting rights to elect the board of directors.
- Directors: Directors are elected by owners or shareholders of the firm and are responsible for taking large decisions. They oversee the company and make important managerial decisions.
- Officers: Officers are elected by directors and look over the day to day management of the corporation. They are generally the “President” of the firm or “ Treasurer”
Difference between Delaware Corporation vs LLC
The Delaware Corporation or C-Corp requires a board of directors for its management whereas an LLC doesn’t require it. LLC can be managed even by a single owner and don’t follow a management hierarchical structure. The prime difference arises in the governance structure. In the case of C-Corp, the management comprises 3 levels namely as shareholders, directors, and officers whereas in the case of LLC there is a legal agreement called the operating agreement which is a contract between all the members to the LLC. Second is the ground of federal taxation. A Corporation has three choices of taxation i.e. C-Corp, S-Corp, and Tax-exempt whereas when it comes to LLC there are only two choices i.e. IRS considers a single member firm as a disregarded entity and a multi-member firm as a partnership agreement. The last and final grounds of difference can be on the basis of privacy. A corporation requires providing the names and addresses of all directors in its annual statement whereas an LLC has to provide very minimum information. It actually doesn’t have to give the names and addresses of its members at all.
Advantages and Disadvantages
Below are the advantages and disadvantages of Delaware Corporation:
- Delaware Court of Chancery has high grounds of respect and is very well established. In case of any litigation, one gets a very experienced lawyer to resolve the problem.
- The structuring of the corporation can be done with ease because Delaware laws are very business-friendly.
- Delaware involves greater privacy as it doesn’t call upon declaring the names and addresses of directors.
- Investors have the high ground of faith in Delaware Corporations and thus these corporations are also investor-friendly.
- Delaware has business-friendly taxation policies which prove very beneficial to the business operating under its umbrella.
- One demerit can be if a business is doing business there but not headquartered in Delaware it has to pay or follow the tax structure of both states of Delaware and the state where it is headquartered.
- One has to bear additional fees to do business in Delaware.
- Delaware Corporation requires additional annual reporting documents in addition to the state where a business may be headquartered.
Delaware Corporation has both benefits and demerits but on looking closely the benefits outweigh the demerits. It solely depends on the business firm what point of the advantage they are looking for. The Delaware Corporation is well guided by the laws of Delaware State and offers a lot of flexibility in doing business.
This is a guide to Delaware Corporation. Here we discuss the introduction to Delaware Corporation with its types, structure, the difference between also with advantages and disadvantages. You can also go through our other related articles to learn more –