Delaware a state situated in the east coast of the United States between, New York and Washington D.C. Delaware Corporation Law allows a Company to be incorporating in delaware relatively quickly and inexpensively, with its profits being free of taxation, provided its business activities are conducted outside the State.
Delaware is called a corporate haven and is a preferred destination for incorporating a new company. This is so because over 50% of all the publicly traded corporations in the United States and a number of the Fortune 500 companies are incorporated in the state of Delaware.
The interest laws in Delaware are relatively lax, thus allowing banks and other financial institutions to charge high rates of interest. This accounts for the preponderance of credit card companies and lenders in Delaware. There are clear taxation advantages to incorporating in delaware. For instance a Company can use various clever schemes to legitimately reduce its overall taxable income. Such schemes include establishing pension schemes, profit sharing schemes etc. for the benefit of members and employees of the company and even the provision of insurances to employees such as medical and life insurance. All of these are tax Deductible actions for a Delaware offshore company.
No tax is charged in Delaware on turnover. This means that a company incorporated in Delaware but
not domiciled there and carrying on its business elsewhere need not pay any income tax to the State of Delaware. In such cases, only Franchise tax and Filing fee have to be paid. These in turn, depend on the amount of share capital that the company holds. In Delaware, it is possible for a company to hold zero share capital so that it only has to pay US$30.
Only a corporation that conducts its business officially on US territory pays the American Federal Tax on Corporations. Non-resident Shareholders do not have to pay Withholding Tax on dividends or tax on inherited shares. There is no need to register with the IRS (Internal Revenue Service) if the Corporation does not conduct business or open accounts in any US bank. However, these Companies may be subject to double taxation as there if there are no corresponding agreements to that effect.
If an LLC, subject to partnership tax treatment conduct no business in Delaware it is not subject to the state income tax and is not required to file a state income tax return. This stipulation is applicable to LLCs only their members are not residing in Delaware. It is mandatory for LLCs conducting their business in Delaware to complete a Franchise Tax report every year showing details of the officers of the corporation. However, there is not need to file financial statements with the state of formation if the corporation or LLC does not own assets within the state or conducts business therein.
Although Delaware does not levy a franchise tax on corporations transacting business in the state, franchise taxes for corporations transacting in Delaware are actually higher as compared to other states, which usually charge little or no tax beyond the corporate income taxes on the portion of the corporations business done in that state.
The primary legislation that governs incorporating in delaware is the Delaware General Corporate Law of 1989. A corresponding legislation that deals with LLCs, dated 1992 also exists. These legislations lay down the procedure to be followed when a company is to be incorporated in Delaware. Usually, companies have their own bylaws for governing the company. These legislations mandate certain stipulations for corporate governance, in addition to the by-laws.
In a Delaware incorporated company, a single person can technically hold all official positions of the corporation-president, secretary, and treasurer-and serve as the sole director. The names of the president, secretary, treasurer, directors etc. need not be listed in the articles of incorporation. Additionally, one does not need to be resident of Delaware to be a shareholder, director or officer of the corporation. The minimum prescribed number of directors for a corporation is one. The directors have to natural persons, having the ability to enter into contracts for themselves or others. They need not be citizens of the United States. The Director may also be the Company President, Vice President, Secretary and Treasurer. The Body of Directors has the right to adopt, amend and change the company bylaw norms, determine the amount of share capital and issue shares. For LLCs, there must be one manager at least, either a natural person or a body corporate of any nationality.
The minimum number of shareholders for a corporation is one whereas the minimum number of members for LLCs is two (to ensure tax classification as a partnership). A corporation (even an international or "offshore" corporation) may be the shareholder of a U.S. corporation. There is no minimum limit as to the amount of authorized share capital. Even if there is no share-capita, shares to the tune of 3000 can still be issued on par value as long as the minimum Franchise tax is paid duly. However, bearer shares are not permitted.
Before the company come into existence a certificate of incorporation has to be filed with the secretary of state. For LLCs, there is a similar requirement of filing the articles of organization or certificate of formation. The certificate of incorporation has to contain several details regarding the proposed name of the company, the organizers and directors of the company, corporate purpose etc.
i. The name can be in any language, though English translation is recommended.
ii. For Corporations: the use of any name that is identical or similar to that of an existing company within the state of incorporation is not allowed. Additionally, the use of the words "bank" or "trust" in the name of a corporation is prohibited unless prior consent is obtained from the banking authorities in the state.
iii. For LLCs: the use of any name that is identical or similar to that of an existing company within the state of formation is prohibited. Additionally, the use of the words "bank", "trust", "insurance" or "reinsurance" in the name of an LLC outright. This is because limited liability companies in most states are simply not allowed to engage in the banking or insurance business.
iv. There are some restrictions regarding the suffixes that can be used in the company name. Corporations can use the suffixes: Incorporated, Corporation, Limited, Company or the abbreviations Inc, Corp, or Ltd, while LLCs can use the suffixes Limited Liability Company and Limited Company or the abbreviations LLC or LC.
i. The minimum number of directors for corporations is one, and this must be a natural person.]
ii. The minimum number of managers for LLCs is one, and this may be either a natural person or a body corporate of any nationality.
i. The minimum number of shareholders for a corporation is one. A shareholder of a Corporation may be another corporation (even an international or "offshore" corporation).
ii. The minimum number of members for LLCs is two. This ensures automatic tax classification as a partnership.
Once a certificate of incorporation or organization is filed, the state can take anything between 5 days to 6 weeks to approve the filing. After the state approves the filing, corporate or LLC, existence begins for the company. The language of all the corporate documentation including the certificate of incorporation must be English and a translation must accompany the same if any other language is used.
The Articles of Incorporation or Certificate of Incorporation are filed with the Secretary of State in the preferred state of incorporation or the preferred state of formation (in case of Limited Liability Companies).
Once the company is incorporating in delaware it must necessarily maintain a registered office in the State of Delaware at the office of a professional registered agent and the data on the incorporated office must be indicated in the Certificate of Incorporation.
Finally, there is another advantage of incorporating in Delaware as Delaware courts have been dealing with incorporation issues for a long time and as such Delaware has an extensive which affords corporations greater ease when dealing with corporate governance and transaction liability issues. The state does maintains a separate corporate law court system and disputes concerning the internal affairs of Delaware corporations are usually filed in the Delaware Court of Chancery, which is a separate court of equity as opposed to a court of law. Since this court is a court of equity, there are no juries, and the judges, called chancellors with one judge being chancellor and the number of vice-chancellors varying from time to time, hear its cases. This court has the legal status of a trial court and litigants may appeal final decisions of the Court of Chancery to the Delaware Supreme Court.
Delaware is considered throughout the US as one of the most attractive incorporation destinations from the organizational point of view. It is a valuable jurisdiction for new companies since there are very few regulations and minimal bureaucratic interference. In addition to this, Delaware courts have been known to construe the Corporation Law liberally and interpret ambiguities and uncertainties to reach feasible and fair constructions.