You have a brilliant idea for a new business, and you have started to get some traction. Now you need a company. This article will summarize the steps one needs to take to create a general C corporation in Delaware as of the date of this article. You may elect to have a Registered Agent of Delaware complete the paperwork, but this will make you knowledgeable of the process to ensure you have covered all the bases. You can also save a little money by doing it yourself.
Decide the type of organization you want to be:
If you have no intention of having investors, consider filing your business in the state your business is in first. I have a general C corporation in Delaware, but I am based in Maryland. As a result, I must pay business fees and file paperwork in both states. This is a drawback of this approach. However, if you have plans to receive funding from venture capital investors, they will want you to file your general C corporation in Delaware instead of having a S corporation or LLC. Here are the main reasons:
- It’s easier for the investors and it is what they want (their words)
- Business laws are well established in Delaware, and it is less costly to resolve disputes in favor of the business
- It is easy to trade shares in a corporation (more difficult in LLC)
- Corporations typically offer more consistency on managerial duties and responsibilities
- General C corporations allow for two or more classes of stock (common stock, founder’s stock and several classes of preferred stock) – S corporations are limited to 100 common shares and must be a natural person not a VC firm (this is critical)
- C corporations can distribute stock options as incentives to employees and BOD
- Fringe benefits can be deducted as a business expense in C corporations
- C corporation’s low taxes on retained earnings
- Fast filing and changes
Before you make this decision, do your research and talk with a trusted accountant or financial advisor.
Determine the number of shares that will be issued at formation, their value and estimated taxes:
The number of shares you issue at formation will depend if you plan to have investors. You can choose the lowest amount (5000 shares) and change this later or issue a larger amount up front. The number and value of shares has tax consequences, so you want to be precise in this effort for financial reasons. If you google this topic, you will quickly learn most experts suggest between 10,000,000 and 100,000,000 shares of stock to start. But why? Initially, some of it is psychological. You feel better getting more shares. The real reason is for growth. At IPO, most top companies’ stocks have a valuation of $10-30 per share. If you then multiply this by the number of outstanding shares (authorized shares held by or sold to shareholders), your company is valued at $100 – 300 M (for 10 M shares). A reasonable initial stock price ($10 – 30 per share) gives more types of investors an opportunity to participate in the IPO. Hence a stock authorization of between 10 – 100 M shares becomes understandable for high growth companies.
To learn more about funding through a case study, the following article is a good read. https://news.crunchbase.com/news/cap-tables-share-structures-valuations-oh-case-study-early-stage-funding/
A domestic stock or non-stock for profit corporation incorporated in Delaware is required to pay an annual franchise tax. The minimum tax is $175.00, for corporations using the Authorized Shares method and a minimum tax of $400.00 for corporations using the Assumed Par Value Capital Method. There are two links below. The first describes the Delaware franchise tax and how it is calculated. The second is a spread sheet to estimate your taxes based on the method you choose.
https://corp.delaware.gov/frtaxcalc/ (description of Delaware franchise tax)
https://corp.delaware.gov/taxcalc/ (Spread sheet for estimation purposes)
I choose 10,000,000 shares of stock and the Assumed Par Value Capital Method. I estimate I will pay $400 in Delaware taxes for my corporation. At some point I hope I will have to increase the number of authorized shares I issued at company formation. This will require extra legal and filing fees, but it will be a good problem to have at that point. Until then, I have enough shares to keep me going the next few years.
Determine a company name:
Sounds simple, right? Getting your name right from the start will save the headache of changing it down the road. Think logo, website, business cards, government paperwork, tax ID, bank account … you get the picture. There is one school of thought that the name should automatically make the business obvious because name brand recognition is very expensive to create. For a startup being cash conservative, this is not an area you want to spend the millions of dollars like large corporations. An example of an obvious business name is Upside Business Travel. It is immediately apparent this company does business travel and there is a benefit to work with them. Conversely, there are those that believe a name should be more curious for people to inquire further. An example of this approach is Arconic, a leading provider of aluminum sheet, plate and extrusions, as well as innovative architectural products. You would never get this from the name. My thoughts are pick an approach you like, select a name and then test it outside of family and friends. Google the topic and there are some very helpful resources in name selection.
Check the name is available:
This is the link to check entity name availability on the State of Delware’s website. You want to ensure the name is available before you file.
Identify your physical or virtual address:
If you have a physical address, great use it. If not and you plan to work out of you home for a while, choose a virtual address. This adds credibility to your business. A virtual place of business costs ~$70 / month in Maryland. An example near me is Launch Workspaces. You can also use this location for meetings with customers. If you plan to get funding from the government (NSF, DOD, etc.), you will be required to register with DUNS, SAM, SBA and Research.gov. These organizations and the government will recognize a virtual address. My company is virtual, and I submitted a full proposal to NSF. It is important you can receive physical mail at your virtual address. This is a standard service.
Select and appoint a Delaware Registered Agent:
A Delaware Register Agent is a responsible third-party located in Delaware who is designated to receive service of process notices, correspondence from the Secretary of State, and other official government notifications (tax forms and notice of lawsuits). There is no way around this service and there is a long list of companies that provide this service. I selected Harvard Business Services. Do a google search and you can pick the one you like. If you choose Harvard Business Services, follow the link: https://www.delawareinc.com/. I have no affiliation with Harvard Business Services but I used their service and had a good experience. I also found their numerous resources useful.
If you want the rest done for you at a reasonable price, let Harvard Business Services complete your registration. Expect to pay approximately $279 (including certification but not expediting) and have your paperwork in 3-5 days electronically via e-mail (basic service). If you want more services, you will pay more. If you want to do-it-yourself, you will likely only save $50-100. I was in a rush, so I did it myself and expedited the process.
When self-filing, you will be preparing your own certificate of incorporation, listing Harvard Business Services, Inc. as the Delaware Registered Agent, and filing the necessary documents directly with the Delaware Secretary of State. Hiring a registered agent for self-filing costs $50. This is the link to only appoint Harvard Business Services as your Delaware Registered Agent.
Fill out the required paperwork:
The State of Delaware Certificate of Incorporation is a simple, 1-page document. Click the link below and follow the instructions. (Clarification on item 5. List your name (the incorporator not the name of the corporation) and the business address the entity will be located. For me this was my virtual address.) I chose the form with a Directors’ Liability clause. You can also choose the form without this (under forms & fees). https://corpfiles.delaware.gov/IncorporationStockDirectorsLiability20.pdf
Once the document is complete, you must upload your document here (click Document Upload after clicking the link). https://icis.corp.delaware.gov/ecorp2/
Instructions: Select a priority (costs vary – review Delaware’s fee schedule). Fill in your name, business address and email. Select “Document Filing Request” and upload file (certificate of incorporation). Enter Corporation name. Document type: Certificate of Incorporation. Select 0 for no certified copies or 1 for one certified copy. If you would like a Certificate of Good Standing, select the box. I ordered 1 certified copy and no Certificate of Good Standing.
Things to consider in filing:
The filing process can take 3-4 days for normal processing and another 5 days in ship by USPS depending on your location in the US. Do you need this yesterday? If so, pay the 24-hour $50 expedite fee. I received my incorporation documents in 3 days from the time of filing by USPS living in Maryland when I paid the 24-hour expedite fee.
A certified copy of your corporation is important if you are planning to open a corporate bank account and some filings with the government may require it. A certified copy of your corporation is different than a certificate of good standing. A Certificate of Good Standing declares that your company is in good standing with the state as of a specific date, meaning it is in full compliance and has paid its annual Franchise Tax Fee. This is typically valid 30-60 days possibly longer. This may be required to purchase or sell real estate, obtain a loan, obtain a Certificate of Authority to operate in another state, merge with another company and more. If you know you are going to need it right away, you can order it with your incorporation documents. If not, you can wait. I did not order a Certificate of Good Standing.
Here are the costs to file for a general corporation in Delaware on your own. These costs are subject to change and were accurate in March of 2020.
- Delaware Registered Agent: $50.00
- Incorporation fee: $50.00
- Receiving / Index: $25.00
- Surcharge Assessment- Sussex $6.00
- Page Assessment-Sussex County $18.00
- Data Entry Fee: $5.00
- Court Municipality Fee, Grgetown: $20.00
- Expedite Fee, 24-hours (optional): $50.00
- Certification fee (optional): $50.00
- Total : $274.00
Now that you have a corporation you will need corporate bylaws. Corporate bylaws give a clear structure to a business outlining fundamental rules and operating procedures for employees, executives and shareholders to follow. You can obtain these from LegalZoom or other legal websites. If you would like a template for corporate bylaws, again do it yourself, click the following link. You can amend these bylaws as your business grows. You do not file your corporate bylaws with the State of Delaware as these are kept internal to your organization.
You will need to have a least one corporate meeting each year. For a single person corporation, this is simply documenting what you have done (formation of company, issuing bylaws, issuing of shares of stock, naming officers, etc.). Once you have more shareholders and directors, this will happen on a periodic basis. You can google a temple for corporate meeting minutes. It’s very straightforward.
Harvard Business Services provides a wealth of information on their website. This will answer most of your questions not answered here.
If you found this article helpful, please like and share with a friend or colleague looking to start a business. If you need support in leadership, design or commercialization of your products, feel free to sign up for a 15 minute slot with me to discuss your project (https://calendly.com/david-1542).