Frequently Asked Questions ...
1. How do I incorporate in Delaware?
1.1 DELAWARE BUSINESS INCORPORATORS, INC. (DBI) will check the availability of your corporate name and file an original Certificate of Incorporation. Since DBI has a direct computer link to the Delaware Secretary of State’s office, we can incorporate your company within minutes of receiving your order and payment.
2. What information must be included in the Certificate of Incorporation?
2.1 The name of the corporation (confirmed by the Delaware Secretary of State’s office to be available). DBI can reserve it for you.
2.2 The name of a Delaware corporation must include an incorporation word such as: “Association,” “Club,” “Company,” “Corporation,” “Foundation,” “Fund,” “Incorporated,” “Institute,” “Limited,” “Society,” “Syndicate,” “Union,” or abbreviations of these words such as “Co.,” “Corp.,” “Inc.” or “Ltd.”
2.3 The name of the Delaware Registered Agent you have appointed: DBI. Every Delaware corporation must have and maintain in this State a Registered Agent who is a resident of Delaware. DBI can be appointed as your Delaware Resident Agent and will provide the following services: check the availability of and reserve your corporate name; prepare and file your Certificate of Incorporation; perform all necessary State government filings and recordings; provide notice of State of Delaware annual franchise tax, reporting and payment requirements, etc. (see Item 5); provide a Registered Agent address in Delaware empowered to receive and process required corporate and legal documents (referred to in legal terms as “service of process”). You cannot use DBI’s address for business address purposes, i.e. I.R.S., checking account, general business mail. DBI can furnish your corporation or LLC its mailing address that may be used for business purposes for a nominal fee. (See Item 4, below.)
2.4 The complete address of your Delaware Registered Agent including street, number, city and county. A post office box number is NOT acceptable.
2.5 The purpose of the proposed corporation must be stated generally and, if desired, specifically. A suitable general statement for an all-purpose corporation is: “The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporate Law of Delaware.”
Another all-purpose statement is “To engage in any enterprise, anywhere in the world, calculated or designed to be profitable to this corporation and in conformity with the laws of the states and countries in which business is transacted for which corporations may be organized under the General Corporation Law of Delaware.”
2.6 Statement regarding: The aggregate number of shares which the corporation shall have the authority to issue and amount of par value of this stock; or that the stock has no par value; or that the corporation is not authorized to issue stock; or that the corporation is non-stock and not-for-profit (also referred to as nonprofit).
2.7 The name and address of the incorporator [who can be a third party – someone other than the owner(s), director(s) or shareholder(s) of the corporation]. Notarization is not required.
2.8 The incorporator must sign the document. When DBI files this document as your Registered Agent, DBI is the incorporator (acting as attorney-in-fact and/or as proxy), and a DBI executive signs it.
2.9 For a complete explanation of the Certificate of Incorporation format, refer to Delaware General Corporation Law, Limited Partnership Act and Business Trust Act, published by Michie and available through DBI. This versatile reference tool expands on all of the topics mentioned in this handbook and is required reading for anyone who has formed a Delaware corporation.
3. What else may be included in the Certificate of Incorporation (also known as the Articles of Incorporation or Corporate Charter)?
3.1 The period of its duration which is usually stated as perpetual.
3.2 Whether or not cumulative voting of shares is authorized.
3.3 Provisions regarding bylaws.
3.4 Provisions regarding the sale or purchase of the corporation’s stock.
3.5 Provisions specifying special voting rights and preferences.
3.6 Provisions limiting or denying to shareholders the preemptive right to acquire additional or treasury shares of the corporation.
3.7 Provisions for the regulation of the internal affairs of the corporation.
3.8 Any other provisions required to define or place parameters on the internal or external organization, financial structure or activities of the corporation.
4. Does the address of DELAWARE BUSINESS INCORPORATORS, INC. (3422 Old Capitol Trail, Suite 700, Wilmington, Delaware 19808-6192) become the legal address of my new Delaware corporation?
4.1 For receipt of legal documents such as communications from the Office of the Secretary of State of Delaware, a subpoena or summons, as your corporation’s Registered Agent – Yes.
4.2 For business or personal mail, phone calls or faxes – No. However, DBI can provide a business mail address and mail forwarding services for a nominal fee.
5. What are the annual fees charged by the State of Delaware for incorporating?
5.1 Minimum fee. The minimum total fee payable to the Division of Corporations of the State of Delaware is $50. For stock corporations, this initial tax is based on authorized capital stock.
5.2 Initial tax. The initial tax is based on the quantity and par value of the capital stock authorized in the Certificate of Incorporation.
Par Value Stock:
Up to $2,000,000 - 20¢ per $1,000
Over $2,000,000 to $20,000,000 - 10¢ per $1,000
Over $20,000,000 - 4¢ per $1,000
No Par Value Stock:
Up to 20,000 shares - 1¢ per share
Over 20,000 shares to 2,000,000 shares - ½¢ per share
Over 2,000,000 shares - 2/5¢ per share
Minimum tax: $15
Receiving and indexing: $25
Miscellaneous: Approximately $30, or more,
depending upon length of the filing
5.3 Amendments (and corrections)
Filing fee is $100 for corporations, unless capital stock is increased, in which event the organization tax (see above) is computed upon the new authorized capital stock less the amount paid upon the capitalization previously authorized.
The filing fee is $50 for an LLC.
5.4 Annual fees and taxes
Annual Report filing fee = $20
Franchise Tax – the lesser of (a) or (b):
(a) Based on authorized shares – par or no par value
3000 shares or less - $30
Over 3,000 to 5,000 shares - $50
Over 5,000 to 10,000 shares - $90
plus $50 for each additional 10,000 shares or part thereof
(b) In the case of par value stock under $100, an alternative is offered based on assumed capital – found by dividing gross assets by all issued shares and multiplying quotient by such authorized par value shares; provided, however, that, if said quotient is less than the par value of any shares having par value, such shares shall be multiplied by their par value instead of by said quotient. Rate of tax is $200 per $1,000,000.
Minimum tax: $30. Maximum tax: $150,000.
Delaware corporations are required to file the Annual Franchise Tax Reports and pay the Franchise Taxes (non-profit, non-stock corporations only need to file the Report). This annual tax is due on or before March 1st for corporations, and June 1st for LLCs. Failure to meet these deadlines will result in a $50 penalty for corporations; and $100 for LLCs, plus a restoration fee of $50 to reinstate your LLC.
DBI offers Tax-On-Time Service for a nominal fee, and will file and pay your Annual Franchise Taxes on time.
5.5 Regulated Investment Companies pay on a different scale prescribed under Section 503(h), the General Corporation Law of the State of Delaware.
5.6 Filing fee for an already incorporated “foreign” corporation (a corporation originally chartered anywhere in the USA other than Delaware), in order to qualify to do business in Delaware (Foreign Corporation Certificate): $150.
6. What other taxes do I have to pay to the State of Delaware?
6.1 No Delaware state income tax for shareholders who are out-of-state residents.
6.2 No state sales taxes on goods and services purchased in Delaware.
6.3 No Delaware State Corporate Income Tax for Delaware corporations headquartered and operating out-of-state.
7. How do I reserve a corporate name?
7.1 The office of the Secretary of the Delaware Department of State maintains records of the names of all other corporations, organized, reserved or registered as a foreign corporation under the laws of Delaware. The name you select must be checked against these records to be certain that it is distinguishable from them.
7.2 DELAWARE BUSINESS INCORPORATORS, INC. (DBI) will do it for you instantly free of charge via our computer data link to the Office of the Secretary of State of Delaware.
7.3 LLCs can be reserved by DBI for a nominal fee of $75.
8. Does the name of my corporation have to have a corporate ending?
8.1 Yes. Examples of approved corporate endings are: “Association,” “Club,” “Company,” “Corporation,” “Foundation,” “Fund,” “Incorporated,” “Institute,” “Limited,” “Society,” “Syndicate,” “Union” or one of the following abbreviations: “Co.,” “Corp.,” “Inc.” or “Ltd.”
8.2 A Limited Liability Company (LLC) must contain the ending “LLC”. “Inc.” is not acceptable in the company name.
9. What about reserving my chosen corporate name in my home state?
9.1 DBI can assist you in reserving your chosen corporate name in your home state (not offshore). Simply call DBI for assistance. Some states charge a nominal fee to reserve a corporate name.
10. Must I formally qualify my Delaware corporation in my own home state in order to transact business there? In other states?
10.1 Your Delaware corporation is a domestic corporation in the State of Delaware. It is a foreign corporation in every other state. You will have to register and qualify it in the state(s) within the borders of which you plan to maintain and staff offices or outlets to transact business. This is not necessary if you sell through independent distributors, manufacturer’s representatives, wholesalers, retailers or through mail order in such states. Please check with your state first.
10.2 To get permission to operate as a foreign corporation–depending on the state(s) where you wish to qualify your corporation–you have to apply either at the office of the secretary of state, commissioner of commerce, corporate commission, superintendent of corporations, state department of assessments and taxation, secretary of the commonwealth, department of the treasury, state corporation commission or corporation commissioner in such state(s).
10.3 The application that must be filed will generally have to contain the same type of information that appears in your Delaware Certificate of Incorporation.
10.4 You will be required to pay the necessary filing fees for such state(s) at the time of application. You must also file an annual report in such state(s) and pay annual state taxes, if any.
10.5 You must keep your corporation books and records on file at your headquarters or home office from which you will be conducting your business.
10.6 DBI can prepare the application to qualify your Delaware corporation in any U.S. state(s) you wish (not offshore), for a fee. The filing fees for this application vary from state to state. These state filing fees are NOT included in the DBI incorporation processing fee.
11. How do I qualify to transact business in Delaware if my corporation is already incorporated in another state or jurisdiction?
11.1 Submit a completed Foreign Corporation certificate, stating:
· Name of corporation as it appears on file with your state of original incorporation.
· Description of the business that the corporation proposes to conduct in Delaware, including a statement that this business is the same as authorized by the jurisdiction of its incorporation.
· The exact language of this form is given in Delaware General Corporation Law, Limited Partnership Act and Business Trust Act, published by Michie.
· Include a copy of the Certificate of Existence issued by an authorized officer of the state or jurisdiction of the original incorporation.
11.2 Pay a fee to the State of Delaware of $150.
11.3 Appoint a Registered Agent such as DBI for service of process.
11.4 DELAWARE BUSINESS INCORPORATORS, INC. (DBI) will provide this qualification service for a fee. DBI will also function as your Registered Agent in Delaware for a nominal annual fee. (All DBI fees are calculated on a calendar year basis beginning January 1st and ending December 31st. They are not prorated.)
12. May I amend my Delaware Certificate of Incorporation after it has been filed?
12.1 Yes. To make such changes as alterations in the corporate name, the amount and classes of authorized stock, etc., a Certificate of Amendment must be filed pursuant to Section 241 (before receipt of stock payment) or Section 242 (after receipt of stock payment, or non-stock corporation) of the General Corporation Law of the State of Delaware.
12.2 The Certificate of Amendment must be signed by an officer of the corporation. Neither notarization nor corporate seal are required.
12.3 DBI will file these amendment documents for you.
13. Is it necessary to hire an attorney to incorporate in the State of Delaware?
13.1 No. DBI can perform all services necessary for incorporation and representation, as your corporation’s Registered Agent in the State of Delaware.
14. Must I or an officer of the corporation being incorporated in Delaware sign the Certificate of Incorporation?
14.1 This is optional. You may if you so desire.
14.2 However, if you are using DBI as your Registered Agent, leave the signature area blank. DBI will designate a member of its staff as temporary incorporator, whose duties and functions are automatically terminated following the filing of your incorporation documents. There is no extra charge for this service. It is included in the DBI incorporation fee.
15. How many officers and directors are required for my Delaware corporation?
15.1 Only one officer or director. One person can be both. Delaware corporate law facilitates setting up a one-person corporation. Neither officers nor directors need to be listed in the Certificate of Incorporation.
16. Which forms must I send to DBI to begin the incorporation of my company in Delaware?
16.1 The DBI Order Form – filled out and signed in ink.
17. Will DBI notify me as soon as the Delaware incorporation is completed?
17.1 Yes. The same day that DBI receives the documents from the Office of the Secretary of State of Delaware, a copy of the corporate charter will be mailed to you.
17.2 A certified copy of your corporate charter will be forwarded by the State of Delaware to be recorded by the Recorder of Deeds of New Castle County, Delaware.
17.3 DBI can provide you with a certified copy of your Certificate of Incorporation for a fee.
18. When are annual reports and annual corporate franchise taxes due and deliverable to the Office of the Secretary of State of Delaware each year?
18.1 The annual corporate franchise tax for corporations is due on or before March 1st each year; and LLC’s June 1st each year.
18.2 Corporations that pay franchise taxes in excess of $5,000 annually must make quarterly payments, due and payable June 1st, September 1st, December 1st and March 1st.
18.3 As your Delaware Registered Agent, DBI will forward to you notifications of franchise taxes well in advance of the due dates each year and help you remain in compliance with Delaware law. Therefore, it is very important for you to make sure that we are kept up to date on your current mailing address.
18.4 If your corporation is a foreign corporation doing business in Delaware, you will likewise be reminded of the necessity to file your annual report (which can be a simple typed document), which, as your Registered Agent, DBI will transmit as soon as it is received each year.
19. When will DBI send me by Corporate Information & Documentation Kit?
19.1 If you purchase a Corporate Information & Documentation Kit from DBI, you will receive it within two to five working days in the USA, following receipt of verification that the documents have been filed with the Office of the Secretary of State of Delaware. Shipment outside of the USA must be prepaid. Overseas shipping charges are not included in DBI’s fee.
20. What is the Certificate of Incorporation?
20.1 It is the Corporate Charter – the authorization by a state permitting a business firm to transact business within its jurisdiction. (In some states, this document is referred to as Articles of Incorporation.)
21. What is the difference between an Open and a Close corporation?
21.1 An Open corporation provides stock that the general public can readily purchase. It may have one shareholder or a group of shareholders. The shareholder(s) owning more than 50% of the shares will control corporate policy and activities through their presence or representation, through proxies, on the board of directors.
21.2 A Close corporation (either C or S type), as defined by Delaware Corporation Law, is one in which all of its issued stock of all classes, exclusive of treasury shares, shall be represented by certificates and shall be held of record by not more than a specified number of persons not exceeding thirty (30).
21.3 The stock of a Close corporation also shall be subject to restrictions of stock transfer, such as a first-refusal option requiring that, should a shareholder elect to sell, the stock must be offered to the corporation or to any other holder of securities in the corporation. These restrictions can be defined in the original bylaws or adopted as a later amendment to the bylaws by a majority vote of the shareholders.
A typical restriction prohibits the transfer of restricted securities to non-resident aliens in order to protect and maintain a corporation’s status as an S corporation under the U.S. Internal Revenue Federal Tax Code.
If you wish to elect S corporation status, you may wish to incorporate as a Close corporation and include this restriction, which will prevent possible automatic loss of your corporation’s S status (see Item 30.4).
22. What is a Foreign corporation?
22.1 If you incorporate in Delaware and operate your company (headquarter and transact your business) in California, for example, your corporation is considered a foreign corporation by California.
22.2 Delaware Corporation Law defines a foreign corporation as a corporation organized under the laws of any jurisdiction other than Delaware. Examples would include corporations chartered in any other U.S. state or territory or other country.
22.3 If you have an existing corporation that is a foreign corporation with respect to Delaware, and, if you want to establish an office and staff it to transact business in Delaware, you must qualify your corporation in Delaware. DELAWARE BUSINESS INCORPORATORS, Inc. (DBI) can handle this for you for a nominal service fee plus the fees required by the State of Delaware.
23. What is a Domestic corporation?
23.1 A corporation is classified as domestic in the state of its incorporation. Thus, if you incorporate in Delaware, your business is a domestic corporation in Delaware. A corporation is classified as foreign in every state other than its state of incorporation. Thus, if you incorporate in Delaware, your company is considered a foreign corporation in any other U.S. state or territory.
24. What is the Domicile of a corporation?
24.1 The legal domicile of a corporation is the state in which the corporation is chartered and from which it receives its authorization to operate. When DBI sets up your Delaware corporation, its domicile will be Delaware even though you may reside and headquarter in another state.
25. What is an “S” corporation?
25.1 An S corporation (formerly called Subchapter S because it was named for a section of the U.S. Internal Revenue Code enacted in 1958) is a form of tax status that the incorporator can elect instead of incorporating or operating as a C corporation. This S election enables the shareholder(s) of a closely held company to enjoy limited liability and other corporate advantages but avoid the penalty of double taxation that occurs when corporation income is subjected, first, to corporate income tax, and is then taxed a second time, as personal income, when corporate earnings which have already been taxed are returned to the shareholders in the form of dividends.
26. What are the advantages of an S Corporation?
The advantages of an S corporation are:
26.1 Avoidance of double taxation of corporate profits distributed as dividends. Earnings are not taxed at the corporate level by the I.R.S. All corporate income passes directly through to the shareholders in proportion to their individual ownership of shares in the corporation, in a paper reporting to the IRS and the shareholder. This income is then taxed only once – at personal rates. A C Corporation must pay a federal corporate income tax. Then, any dividends, which you and other shareholders receive, are taxed a second time by the I.R.S. as personal income.
26.2 The S corporation, itself, pays no federal corporate income taxes and is not subject to the corporate alternative minimum tax.
26.3 The income or losses of an S corporation are deemed to be the income or losses of its shareholders in direct proportion to their share of ownership in the corporation.
26.4 Capital losses of the S corporation pass through to the shareholders who can use them to offset other income, providing that they do not deduct as a loss any amount exceeding their individual investments in, or loans to the corporation tax basis. Such losses may be carried forward indefinitely for possible later use if not currently usable.
26.5 An S corporation provides the same legal protection from personal financial liability as a C corporation plus the same ease of transfer of ownership and perpetuity of existence, permitting it to survive its original founders and/or owners.
26.6 You do not have to worry about having to pay federal corporate income tax on accumulated earnings. (C corporations that do not distribute their earnings for a taxable year may be subject to a tax on accumulated earnings in excess of a certain figure such as $150,000, which varies according to dividends paid, and other adjustments provided for in the Internal Revenue Code.)
26.7 You can pay yourself as high a salary as you wish without running the risk that the I.R.S. will consider it “out of line with comparable salaries in your industry.”
26.8 If you have a one-person S corporation, you need not be concerned about the I.R.S. deciding that you are “a personal holding company” and subject, therefore, to additional taxation. (This is a distinct hazard for one-person operators of some types of enterprises.)
26.9 Avoidance of double taxation of capital gains, should the corporation or any of its assets be sold.
26.10 Stockholder employees of S corporations may participate along with other employees (or individually in the case of a one-person corporation) in qualified retirement plans set up by the S corporation. Under the Tax Equity and Fiscal Responsibility Act (TEFRA), S corporations, C corporations and partnerships are treated with few significant differences with respect to qualified retirement plans such as an HR 10 (Keogh) Plan. A Keogh plan through your S corporation allows you to save up to 20 percent of your income, up to $30,000 per year, in a tax-deferred retirement account – a major tax benefit.
The S corporation can take a tax deduction for the full amount of its contribution to the plan. In the case of shareholder employees, the contribution made on their behalf must be reasonable when compared to compensation they receive. The employee (shareholder or not) is not required to include as income either the S corporation’s contributions or the subsequent earnings from the invested contributions until such time as he/she receives a distribution from the qualified plan.
26.11 A shareholder’s cost basis in S corporation stock rises as the shareholder pays taxes on undistributed corporate income. That lowers the taxable capital gain if and when the owner sells the stock. In most cases, the saving should offset a rise in income tax rates.
26.12 S corporations are usually permitted to use the cash accounting system, which is the simplest. More than half of all small firms in the USA are taxed as S corporations.
27. What are the limitations of S corporation status?
27.1 The total number of an S corporation’s shareholders must not exceed 75.
27.2 These shareholders are not permitted to be nonresident aliens. (They may, however, be resident non-U.S. citizens, estates or certain trusts. But residence in a U.S. territory or possession is not sufficient for qualification. The individual must be the resident of a state of the United States.)
27.3 S corporations must not have corporate, partnership or most trust-type shareholders. They must be either qualified individuals or the estates of deceased persons in the process of administration. Thus, an S corporation is not permitted to be a subsidiary of another corporation. The only exception to the rule is if it is a 100 percent-owned subsidiary of another S corporation.
27.4 S corporations may own subsidiaries but they must not own more than 80 percent of a non-S corporation subsidiary’s stock. They are permitted to own 100 percent of another S corporation.
27.5 S corporations must use the calendar year as their tax year unless an I.R.S.-approved business purpose–such as a highly seasonal business–can be established for a different taxable year. For example, the I.R.S. allows a variant fiscal year if it can be demonstrated that for three consecutive years 25 percent or more of the corporation’s gross receipts are realized during the last two months of the desired fiscal year. This fiscal year-end date must be September 30 or later.
27.6 Fringe benefits paid to shareholders who own two percent or more of the S corporation’s stock – such as medical reimbursement plans and group term life insurance – are not deductible corporate expenses under the latest federal tax laws, unless such expenses are reclassified as wage income to the greater than two percent owners.
27.7 While S corporation income is exempt from corporate tax at the federal level, not all states and territories exempt such corporations from state (or territorial) corporate taxes. States and territories that do not recognize S corporation tax status of S corporations incorporated in and/or operating in their jurisdiction include: The District of Columbia (Washington, DC), New Hampshire, Tennessee and Puerto Rico. These jurisdictions require S corporations to pay state (territorial or district) taxes at C-corporation rates.
Other states and territories that recognize S corporation status but nevertheless may require them to pay C corporation rates include: Arizona, Connecticut, Guam, Michigan, New Jersey, New York, Rhode Island and Vermont.
The majority of the states impose state income taxes on the shares of income of S corporations operating in their state that passes through to shareholders who reside out-of-state. Some states, including Delaware, require that an S corporation withhold state income taxes from distributions to nonresident shareholders. (In addition to adding to the accounting/bookkeeping workload, this might result in non-prorata distributions which in turn could lead to an I.R.S. finding that your corporation has more than one class of stock, in which case it could cause a retroactive termination of your federal S corporation election.)
27.8 S corporations are permitted to have only one class of common stock; however, this class may be divided into two categories: (1) Voting shares and (2) Nonvoting shares.
27.9 If you are converting an existing C corporation to S corporation status, to completely avoid C corporation income taxes, no more than 25 percent of its gross income may be derived from passive sources such as rent, dividends, interest, annuities, royalties, sales or exchange of securities.
However, if you are incorporating your enterprise from the beginning as an S corporation, it may earn as much passive income as you wish with no limitations.
27.10 When a C corporation switches to S status and later disposes of an asset of the C corporation that became an asset of the new S corporation, it must pay taxes on the “built-in gain” it benefited by at the time of the S election.
If you have a C corporation that has appreciable assets and plan to elect S corporation status, you should obtain an independent professional appraisal of both the bulk sale (wholesale) value and retail value of such assets at the time of S election.
27.11 With an S corporation, shareholders are taxed on their shares of corporate earnings whether they take these earnings as dividend distributions or retain the earnings in the corporation. All earnings (profits) must pass through to shareholders, at least on paper. In other words, even though the corporate profits for a given year remain physically in the corporate bank account – to build up working capital, for example – and are never transferred to the shareholder(s), each shareholder must nevertheless pay personal income tax on his/her share of those profits, which will be considered by the I.R.S. to be: (1) individual income and (2) paid-in capital.
28. In what circumstances is it particularly desirable to consider electing S corporation status?
28.1 If you already have or plan to start a one-person or closely held business or professional activity, with probable losses during the first-year/second-year start-up period resulting from initial investments in equipment, doing-business materials or inventory, heavy operating expenses, low sales or other income, etc. The S election permits the pass-through of operating losses to shareholders who may have income to offset such losses.
28.2 If you already have a business with a high taxable income that distributes the majority of its earnings as dividends and that has low capital spending requirements.
28.3 The Federal Income Tax Law of 1993 increased the top individual (personal) tax rate from 31 to 36 percent on taxable income over $115,000 for single people and $140,000 for married couples filing jointly. Income in excess of $250,000 for singles or couples is subject to a 10 percent surcharge, raising their “top” rate to 39.6 percent. Since some exemptions and deductions may be eliminated for high-income people, their true top rate can reach 44 percent.
The federal corporate tax rate for C corporations is 34 percent for firms with taxable income up to $10 million and 35 percent for income in excess of this figure. As indicated under Item 26.2, above, S corporations are not subject to paying a federal corporate income tax.
Therefore, if you anticipate that your individual (personal) taxable income will be less than $115,000, if single, or $140,000, if married filing jointly, you should consider electing S corporate status or forming a Limited Liability Company (LLC) – see Items 31-35, below. However, if your personal taxable income is likely to bump you into the 36 percent bracket or higher, you might be better off forming a regular C corporation, despite the double taxation of dividends by the I.R.S. (and the majority of state governments).
Note: Any company that changes its corporate status generally is prevented by Federal tax law from switching back for five years.
29. How is an S corporation set up?
29.1 In the case of a corporation being formed for the first time, you must fill out and file I.R.S. Form No. 2553 prior to the 15th day of the third month of the corporation’s existence.
In Delaware, the effective date of incorporation is nominally the filing date; however, you can, if you wish, stipulate that your Certificate of Incorporation is not to become effective until a specified time subsequent to the time it is filed, providing that such time shall not be later than a time on the 90th day after the date of its filing.
29.2 In the case of an existing corporation, I.R.S. Form No. 2553 must be filed on or prior to the 15th day of the third month of your corporation’s tax year.
29.3 All shareholders must sign Form No. 2553 prior to filing it.
29.4 Mail Form No. 2553 via registered mail to your local I.R.S. office. Your receipt will record the legal date of your election of S corporation status and will stand up in court, should the I.R.S. later report that it never received your Form No. 2553.
29.5 DELAWARE BUSINESS INCORPORATORS, INC. (DBI) will be glad to provide you with the necessary form to elect S corporation status with the IRS, for a nominal service fee.
30. Is it possible to inadvertently lose S corporate status and revert to C corporate status?
30.1 Yes. You may lose it automatically if you violate the I.R.S. rules. For example, you can lose it if you have 75 shareholders and one of your shareholders gives a share of stock to someone else – even a member of a family, such as a child – causing you to exceed the shareholder number limit, unless the I.R.S. decides to waive the automatic termination that results under the law.
Note that when a husband and wife own stock as “tenants in common,” or “joint tenants,” or, as “community property,” they are counted by the I.R.S. as one shareholder in terms of this S corporation requirement. However, if the spouses own the shares individually, they are counted as two shareholders – even if they also own some stock in the corporation jointly. If either spouse, but not both, owns shares individually as well as jointly, these two individuals count as one shareholder. And, if two shareholders not legally married own stock jointly, the I.R.S. counts them as two shareholders.
30.2 If you issue a second class of stock, your S corporation can automatically become a C corporation with corporate tax liability. Note that if your S corporation’s shareholders lend too much money to the corporation, rather than investing the money in stock as capital at risk, the I.R.S. may nevertheless deem the loan to be an investment in stock and rule that stock to be of a different class than the one originally issued. Consequently, your S corporation will be viewed as having more than one class of stock and will lose its S status. The single case in which you are allowed to have two classes of stock is when you issue both voting and nonvoting stock.
30.3 You lose S status if another corporation, partnership or certain types of trust become a shareholder.
30.4 If, even without your knowledge, a share of stock should be transferred to a nonresident alien, your S corporation could become a C corporation, if the I.R.S. decides not to exercise their statutory permission from Congress to waive inadvertent termination of your S status.
The best way to prevent such an occurrence is to incorporate as a “Close” corporation and to include in your corporate bylaws specific rules for stock transfer, including the notification of the president and/or treasurer and/or secretary of the name, permanent residence address and citizenship status of the purchaser of any shares of stock sold by any shareholder.
You can also state in your bylaws that your S-corporation stock “may not be sold to any individual or entity, the sale to whom or which would result in the loss of S-corporation status.” Or, you can simply state “All stock held by shareholders, when offered for sale, must first be offered to the corporation and/or its shareholders who shall have the right of first refusal for a period of thirty (30) days.”
31. Can you merge a “C” corporation to an LLC, or an LLC to a “C” corporation?
31.1 Yes. However, you should consult your tax advisor about possible tax consequences resulting from this type of transaction.
32. What are Limited Liability Companies?
32.1 A Limited Liability Company, also referred to as an “LLC,” is a new class of business operating entity with legal status in certain states (see below) – a hybrid between an S corporation and a partnership. It combines the tax advantage of a partnership (avoidance of corporate income tax) with the legal safeguard of a corporation – namely the fact that owners’ personal assets are not normally at risk in business-related lawsuits.
As of December 1997, all states, plus the District of Columbia, have passed laws governing the administration and operation of LLCs within their jurisdictions.
32.2 An excellent reference that provides comprehensive guidance for setting up and administrating LLCs and converting other business entities to LLCs is a manual entitled Limited Liability Companies: Tax and Business Law, by Carter G. Bishop and Daniel S. Kleinberger, available from Warren, Gorham & Lamont, 31 St. James Avenue, Boston, Massachusetts 02116, for US$145 plus postage, handling and applicable sales tax. (Supplemented with updates twice annually.) To order in the USA, phone TOLL FREE 1-800-950-1216, Ext. 127.
33. What are the advantages of operating as an LLC? (Form 1065)
33.1 The LLC is treated as a partnership for federal tax reporting. Taxable income and losses pass through to its members (owners) in the same manner, as is the case with partnerships and similar to S corporations.
33.2 The law allows the inclusion of liabilities of the LLC in order to increase basis for tax purposes (as in the case of a partnership).
33.3 The liability of all members is limited to their investments in the LLC (unless they personally guarantee other debt incurred by the LLC).
33.4 Payment to a retiring member may be structured so as to allow part of the payment to be deducted as an expense to the LLC.
33.5 The Delaware Limited Company Liability Act does not require that a limited liability company agreement be in English.
33.6 If an LLC has no members in the U.S., and derives no income from sources within the U.S., then, according to current law, as of December 1997, no U.S. federal income taxes will be due by the members who are nonresident aliens of the U.S.
33.7 An LLC can be formed by one member/manager. Delaware does not require the member/manager be listed in the document. The new IRS ruling allows the LLC to be perpetual.
34. What are the advantages of operating as a Delaware LLC by nonresident non-U.S. citizens?
34.1 If properly structured, a Delaware LLC will be treated as a partnership for Federal income tax purposes. And, you may be able to legally avoid all U.S. Federal income taxes for non-U.S. business source income.
34.2 The contractual flexibility of a Delaware LLC is unmatched by any other U.S. states’ LLC statute, and offers benefits typical of many offshore jurisdictions, i.e. the German “GmbH.”
34.3 As of December 1997, U.S. law does not permit the Internal Revenue Service to report the income of a Delaware LLC to the government taxing authority of the country where you reside.
35. What are the advantages of an LLC over an S corporation?
35.1 With the single exception of requiring at least one member (owner), LLCs do not restrict the number and type of owners. The LLC, for example, is permitted to have more than 75 members.
35.2 Corporations, nonresident aliens, limited or general partnerships, estates, charitable organizations and pension plans are all permitted to be owners of an LLC.
35.3 The LLC law permits special allocations to owners of income, expense, gain and loss.
35.4 An LLC may own 100 percent of the shares of stock of another corporation, whereas the S corporation is limited to owning 80 percent, except in the case of a 100 percent owned S corporation subsidiary.
35.5 More than one class of “membership interest” (similar to stock) is allowed.
35.6 LLC owners may obtain additional tax losses from their allowable individual percentages of certain company liabilities, rather than solely through direct loans, as required in the case of S corporations.
35.7 An LLC owner may obtain additional tax advantages from a special “step-up” option, previously available only to partnerships, under Section 754 of the Internal Revenue Code.
36. What are the advantages of an LLC over a partnership?
36.1 Each member enjoys limited liability, as compared to the risk of unlimited liability that general partners must face in a partnership.
36.2 Unlike limited partners, LLC owners may participate in company management without fear of losing their protected, limited liability status.
36.3 LLC members may be able to avoid the I.R.S. passive-loss limitations and take federal income tax deductions for losses caused by the business – a benefit often unavailable to limited partners.
37. What are the disadvantages of operating as an LLC?
37.1 The benefits for owner-employees, such as health care or life insurance, are only partially deductible from these members’ individual federal income tax returns.
37.2 If you want your LLC to have a fiscal year other than a calendar year, a special election is required.
37.3 There is a legal requirement for a Limited Liability Company Agreement among its members. An attorney competent in corporate, contract and tax law should draft it. Tax treatment of the LLC as a corporation or partnership is going to be governed by the Agreement. And, regardless of the nature of the Agreement drafted, tax treatment is completely predictable only if you obtain a Private Letter Ruling from the Internal Revenue Service on a case-by-case basis.
38. What are the advantages to a holding company of incorporating and operating in Delaware?
38.1 Corporations whose activities within Delaware are confined to the maintenance and management of their intangible investments or of the intangible investments of corporations or business trusts registered as investment companies under the Investment Company Act of 1940, as amended (15 U.S.C. 80a-1 et seq.), and the collection and distribution of the income from such investments or from tangible property physically located outside of Delaware are exempt from corporate taxation by the State of Delaware.
For the purposes of this statute, intangible investments are deemed to include – without limitation – investments in stocks, bonds, notes and other debt obligations (including debt obligations of affiliated corporations), patents, patent applications, trademarks, trade names and similar types of intangible assets. In certain situations, flow-through income deriving from a limited partnership interest, may qualify as income from an intangible investment.
There are also special situations that can provide Delaware State Corporate Tax savings when forming a leasing company or liquidating a company.
39. What is required to be recognized as a non-corporate entity?
39.1 In order to be recognized as a non-corporate entity, there cannot be more than four corporate characteristics, as follows:
a) Continuity of life;
b) Centralization of management;
c) Free transferability of interest; and
d) Limited liability.
39.2 When establishing the LLC, Delaware law allows you to carefully select what type of characteristics the entity should have.
Otherwise it will be deemed a corporation.
40. What is Issued Stock?
40.1 Issued Stock is corporate stock, which has been issued and held in the corporation’s treasury or sold or distributed to shareholders.
41. What is Common Stock?
41.1 Common Stock is corporate stock, which normally entitles the shareholder to dividends if the corporation is profitable, and does not need to retain all of its earnings for its own purposes.
41.2 This stock also carries voting rights unless it is classed as Nonvoting common stock.
42. What is Preferred Stock?
42.1 Preferred Stock typically entitles its shareholders to priority over other stock in the distribution of profits.
42.2 Frequently, preferred stock entitles its holders to dividends of a specified amount each year, which must be paid before common stock, dividends, if any, are paid.
42.3 Preferred stockholders typically surrender voting rights in return for priority in dividend payout. However, they may obtain voting rights by deferring their dividends. These dividends, in turn, will accrue, adding to the overall outstanding debt of the company.
43. What is Convertible Preferred Stock?
43.1 Convertible Preferred stock carries the privileges and entitlements of preferred stock and gives the holders the right, at their option, to convert these shares into common stock, according to a specified formula.
44. Does one stock certificate equal one share of stock?
44.1 One stock certificate can represent any number of shares up to the amount authorized, as stated on the Certificate of Incorporation. The face amount can either be printed on the stock certificate, or it has a blank space to be filled in with the number of shares it is to represent by the corporate officer issuing the stock.
45. What is the difference between Par Value and No Par Value stock?
45.1 Par Value stock certificates carry a stated value on their face. It is the monetary value assigned to each share of stock in the charter of the corporation.
45.2 In Delaware, par value stock may be issued only in return for “considerations” such as money, property or services of value at least equal to the value of the shares issued. If the purchase of the shares is with cash, the transaction is simple.
45.3 If par value shares are purchased with property, the value of the property must be established by an independent licensed appraiser. And the value of the shares exchanged for the property may not exceed the dollar amount of the appraisal.
45.4 If the par value shares are exchanged in return for services, such services must already have been performed, and they must be valued at the going rate for such services. The service provider must then treat such value as service income.
45.5 No Par Value stock has no stated value in the corporate charter. Such shares may be sold for whatever the investor is willing to pay.
45.6 The initial tax in Delaware is based on the type and value of stock.
45.7 The majority of U.S. firms (and Delaware corporations) are probably incorporated with 1,500 shares of no par value common stock authorized by their original charter.
45.8 The actual market value of an established corporation that has been operating for some time has, of course, no relation to the face amount of the stock, whether it is par value or no par value stock. The more profitable the company and the more assets it accumulates and the better its prospects, the more each share of common stock tends to be worth in the marketplace.
46. What is a Corporate Security?
46.1 A Security is a share of stock, bond, note, debenture, or other financial instrument, issued by a corporation and registered as to its ownership on the books of a corporation.
47. What are Treasury Shares?
47.1 Treasury Shares are neither shares of stock issued and subsequently acquired by the corporation and neither cancelled nor retired following such acquisition.
47.2 Such shares are included in the total number of shares issued but are not deemed outstanding for voting, quorum or dividend purposes.
47.3 Treasury shares are typically utilized for sales to employees under stock option plans, for future sales to the public, for effecting corporate acquisitions or as stock dividends for shareholders.
48. What is Capital Stock?
48.1 Capital Stock is the total amount of stock a corporation is authorized to issue by its certificate of incorporation (also referred to as its corporate charter or articles of incorporation).
49. What is Paid-up Capital?
49.1 Paid-up Capital is the total amount paid by shareholders for their shares of capital stock. On the balance sheet of the corporation, paid-up capital is equal to the stated value (par value or no par value) of its common stock plus what shareholders may have paid, or contributed in value, in excess of stated value.
50. What is Capital?
50.1 Capital is the money or other assets of value (usually stocks, bonds or other securities that can be readily converted to cash at an easily established market value) which shareholders invest in a business to enable it to operate.
50.2 The capital of an established corporation is normally defined as the contributions of the shareholders plus accumulated profits. It is the total book worth of the enterprise after all liabilities are deducted.
51. What is Stated Capital?
51.1 Stated Capital is the sum of the par value of all issued shares of the corporation assigned par value plus other amounts that have been paid into the stated capital of the corporation.
52. What is Capitalization?
52.1 Capitalization is the total value of all securities of an enterprise.
52.2 Capitalization sometimes includes long-term debt, if any. It represents what would have to be paid to investors and long-term creditors if the business and its assets were to be liquidated.
53. What are Net Assets?
53.1 Net Assets are the amount by which the total assets of a corporation, including money, securities, property, equipment, etc., exceed its total debts.
54. What is Surplus?
54.1 Surplus is the amount by which the net assets of a corporation exceed its stated capital.
55. What is Paid-in Surplus?
55.1 Paid-in surplus is the difference between paid-up capital and the stated value of the corporate stock. It is the surplus that is created when shareholders have paid more for their stock than the stated value (par value or no par value) per share.
56. What is Earned Surplus?
56.1 Earned Surplus is equal to the profits a corporation has retained since its incorporation. It is synonymous with retained earnings, retained income, and accumulated surplus.
56.2 Earned surplus may also include portions of the surplus(es) of other corporations that may have been acquired by or merged or consolidated into the corporation.
57. What is Capital Surplus?
57.1 Capital Surplus is the sum of the paid-in surplus (if any), profits (if any) retained as earned surplus and the surplus (if any) created by a revaluation of assets, including “good will” (upon which a value may be set).
58. What is Operating Surplus?
58.1 Operating Surplus is the amount remaining at the end of a corporation’s reporting period (fiscal year), following the deduction of expenses, taxes and dividends. At the end of the fiscal year, operating surplus is added to earned surplus on the corporation’s books.
59. What is Total Surplus?
59.1 Total Surplus is the sum of all surpluses, including earned and capital surplus and any additions to surplus from revaluations of assets which may have appreciated or depreciated in value during the fiscal year.
60. What is Equity?
60.1 Equity is the net investment, which shareholders have in their corporation. It is another term for Net Worth which is what remains for the owners after all liabilities are deducted from assets.
61. What is Limited Liability?
61.1 Limited liability is a feature of corporations and limited liability companies by which shareholders of corporations and members of limited liability companies are not personally obligated for the debts, obligations or liabilities of the corporation or limited liability company.
61.2 This means that, generally, if the requirements of law have been met, a shareholder’s or member’s financial risk will be limited to the amount paid for shares or membership interest.
62. What are Bylaws?
62.1Bylaws are the rules adopted by the founders and/or directors of a corporation, specifying the conditions under which it may be operated. Frequently, these bylaws are later amended to accommodate new circumstances, by a majority vote of the corporate directors.
62.2 For Delaware corporations, these bylaws must conform to Delaware laws concerning the responsibilities, rights and duties of directors, officers and majority and minority shareholders. DELAWARE BUSINESS INCORPORATORS, INC. (DBI) can help you by suggesting useful bylaws, which are in compliance with Delaware laws.
63. What is the Corporate Seal? Do I have to have one?
63.1 The Corporate Seal is the impression of a design, usually your corporate name, which you press into paper with a male and a female die, mounted in a hand tool like a notary seal.
63.2 This seal may also be a facsimile, which is printed on the document.
63.3 Certain states require or permit the seal of a corporation to be placed on stock certificates, bonds or other corporate documents.
63.4 In Delaware, a corporation, like a natural person, may contract without the use of a seal on the document unless the seal is required by a statute or by the corporation’s charter. However, it is implied from the presence of the seal that the corporation has authorized the official to sign the document in question.
In Delaware, corporate seals are commonly applied to deeds, leases and notes from banks in conjunction with the signature of a corporate officer.
63.5 DBI can furnish you a Corporate/LLC Kit, which includes your corporate seal and applicator tool.
64. How can a corporation incorporated in a country outside of the United States and its territories become a Delaware corporation?
64.1 Any non-United States corporation may become “domesticated” in the State of Delaware by filing a Certification of Domestication and a Certificate of Incorporation.
64.2 The Certification of Domestication must certify: (1) The date on which and jurisdiction where the corporation was first incorporated; (2) The name of the corporation immediately prior to the filing of the Certification of Domestication and the name of the corporation as set forth in its certificate of incorporation filed in Delaware; and (3) The jurisdiction that constituted its seat siege social, or principal place of business, or central administration of the corporation immediately prior to the filing of the Certification of Domestication.
64.3 The Certification of Domestication must be signed by any corporate officer, director, trustee, manager or partner who is authorized to sign on behalf of the corporation.
64.4 Upon the filing of the certificate of domestication and incorporation, the corporation shall thereafter be subject to the Delaware Corporation Law, although the existence of the corporation shall be deemed to have commenced on the date the corporation commenced its existence in the jurisdiction in which the corporation was first formed.
64.5 A qualification fee of $210 is charged by the State of Delaware. DBI can prepare and file the Certification of Domestication for a fee.
64.6 A non-United States corporation can of course set up a subsidiary in Delaware as a Delaware corporation, in which case the normal Delaware incorporation procedure outlined in these pages is applied.
65. How can a nonresident non-U.S. citizen set up a Delaware corporation?
65.1 An individual who is a citizen and resident of another country may organize a C corporation, which he/she incorporates in Delaware, through DBI, by following the normal Delaware incorporation procedures outlined herein. Nonresident non-U.S. citizens are prohibited by federal tax laws from forming an S corporation here; however, they may set up a Limited Liability Company (LLC).
66. How are Delaware corporations which are owned by nonresident/non-U.S. citizens or offshore corporations taxed?
66.1 These corporations are subject to U.S. federal corporate income taxes and Delaware corporate income taxes.
67. Does a Delaware C corporation, headquartered out of state, with an office or plant in Delaware, have to pay Delaware State Corporate Income Tax on the revenues generated by that office or plant?
67.1 Yes. Delaware evaluates three types of activity in determining what portion of income will be subject to Delaware Corporate Income Tax: (1) Corporate sales attributable to Delaware, (2) Property located in Delaware and (3) Payroll incurred in Delaware.
68. If all of the products/services of the above office/plant are sold and delivered to out-of-state customers, is this out-of-state-headquartered Delaware C corporation still liable for the Delaware State Corporate Income Tax?
68.1 Yes. See 67.1 above.
69. Is it liable for Delaware State Corporate Income Tax only on the revenues from the products/services sold and delivered to customers located in Delaware?
69.1 No. Not necessarily. See 67.1.
70. Does a Delaware C corporation, headquartered and operating in Delaware, with out-of-state offices/plants, have to pay Delaware State Corporate Income Tax on revenues from products or services produced and sold out of state?
71. Does a Delaware C corporation, headquartered in Delaware, with out-of-state offices or plants, have to pay Delaware State Corporate Income Tax on revenues from products or services produced out of state and sold out of state?
71.1 Generally, no – but see 67.1.
72. Does a Delaware C corporation, headquartered in Delaware, with out-of-state offices or plants, have to pay Delaware State Income Tax on revenues from products/services produced out of state and sold/delivered in Delaware?
72.1 Generally, yes – but see 67.1.
73. How do I incorporate a not-for-profit corporation in Delaware?
73.1 The procedure is essentially the same as for incorporating a for-profit corporation.
73.2 The fact that the corporation shall not have the authority to issue capital stock must be stated in the Certificate of Incorporation. It must also be stated that the corporation is a not-for-profit (or nonprofit) corporation.
73.3 The conditions of membership in such corporations must likewise be stated in the Certificate of Incorporation, or the certificate may provide that the conditions of membership may be stated by the bylaws.
73.4 Not-for-profit (nonprofit) corporations whose statement of purpose qualifies them for I.R.S. tax-exempt status are also exempt from Delaware’s annual franchise or license tax on Delaware corporations. The non-profit corporation must still file a Delaware annual franchise tax report, due March 1st annually, and pay the $20 annual reporting fee. Note that a not-for-profit corporation is not exempt from Federal income taxes unless it receives tax-exempt status from the IRS.
If you are applying for tax-exempt status, contact your local I.R.S. office for filing requirements. You must supply DBI with the exact purpose statement per IRS 5019© (3) code.
73.5 DELAWARE BUSINESS INCORPORATORS, INC. (DBI) will incorporate your organization as a not-for-profit corporation upon receipt of fees charged by the State of Delaware, plus the DBI fee. Additional filing fees apply.
74. What happens if we do not pay our annual Delaware Franchise Tax?
74.1 If your Delaware corporation does not pay its annual Delaware Franchise Tax to the State of Delaware, the State will treat it like any other tax delinquency. It becomes a debt of your corporation, and the State of Delaware becomes the creditor.
74.2 The franchise tax shall be due and payable on March 1 following the close of the calendar year, except that with respect to a corporation whose franchise tax liability for the current calendar year is estimated to exceed $5,000, a tentative return and tax shall be due and payable as follows:
- Forty percent of the estimated tax on June 1 of the current year;
- Twenty percent of the estimated tax on September 1 of the current year;
- Twenty percent of the estimated tax on December 1 of the current year;
- The remainder of the tax as finally determined together with the annual franchise tax report on March 1 following the close of the calendar year.
In the event of neglect, refusal or failure on the part of any corporation to file the annual franchise tax report with the Secretary of State on or before March 1, the corporation shall pay the sum of $50 to be recovered by adding that amount to the franchise tax as herein determined and fixed, and such additional sum shall become a part of the franchise tax as so determined and fixed, and shall be collected in the same manner and subject to the same penalties.
If the tax of any corporation remains unpaid after the due dates established by this statute, the tax shall bear interest at the rate of 1.5 percent for each month or portion thereof until fully paid.
74.3 Note that, under Delaware law, the shares of any person in any corporation with all the rights thereto belonging or any person’s option to acquire the shares or his/her right or interest in the shares may be attached for debt or other demands. So many of the shares, or so much of the option, right or interest therein may be sold at public sale to the highest bidder as shall be sufficient to satisfy the debt or other demand, interest and costs, upon an order issued therefore by the court from which the attachment process issued, and after such notice as is required for sales upon execution process.
75. If corporate directors and officers are optional in Delaware, who is responsible for signing business agreements, invoices, etc.?
75.1 The individual who owns the corporation or the individual he/she designates (an attorney or accountant, for example), as an agent of the corporation, and/or to whom he/she assigns power of attorney.
76. What documents should I send to my Registered Agent every year? Will you notify me every year as to which legal forms and documents I should file annually?
76.1 Each year that DELAWARE BUSINESS INCORPORATORS, INC. (DBI) acts as your registered agent, it will bill you for the Delaware Registered Agent fee for the subsequent year. If this fee is not paid promptly, your corporation or Limited Liability Company (LLC) will cease to exist, if DBI resigns as your Delaware Registered Agent.
76.2 If you have a Delaware corporation, each year, on or before December 31, DELAWARE BUSINESS INCORPORATORS, INC. (DBI) will send to you your Annual Delaware Franchise Tax Report form. This form must be filled in and mailed to arrive in the hands of the Office of the Delaware Secretary of State, Corporations Division before March 1, or your corporation will be considered “VOID” (cease to be in “good standing”) by the State of Delaware.
76.3 If you have a Delaware LLC, each year, on or before April 31, DBI will send to you your Annual Delaware Franchise Tax Report form. This form must be filled in and mailed to arrive in the hands of the Office of the Delaware Secretary of State, Corporations Division before June 1, or your LLC will cease to be in “Good Standing” by the State of Delaware.
Note: Late fees and penalties will be assessed, if the state does not receive payment on or before the due date.
76.4 Other documents such as U.S. federal or state tax documents, U.S. social security tax documents, or other U.S. federal or state tax, or other regulatory documents, will not be furnished by DBI’s keep your corporation, or LLC, in “good standing.” For Delaware corporations, be sure to pay the annual franchise tax by March 1; and June 1 for LLCs, to the Delaware Division of Corporations, and your Delaware Registered Agent fee to DBI, when due, annually, on the anniversary date of your incorporation.
77. What happens whenever a Certificate of Incorporation is received by the Delaware Division of Corporations with the words bank or trust or a derivative of either word in the corporate name?
77.1 The Division of Corporations will forward the Certificate of Incorporation to the State Bank Commissioner or his designee prior to filing, pursuant to Title 8, Delaware Code, sections 126 and 395, and Title 5, Delaware Code, section 721. After review by the Commissioner or his designee, a recommendation will be made to the Division of Corporations indicating whether or not the name should be approved.
77.2 Whenever DBI receives a corporate name, from a client, for filing with the Delaware Division of Corporations which contains the words bank or trust or a derivative of either word in the corporate name, DBI immediately faxes or mails the State Bank Commissioner’s form to the client for completion, and submission for approval.
78. What are the individual advantages to forming a Delaware corporation, or Limited Liability Company (LLC) to own my yacht, boat or other vessel, and in what state should I register it?
78.1 The ownership of your yacht, by your Delaware corporation, with all of its well-known corporate tax advantages, limits your individual liability to that of a stockholder of the corporation. Delaware law permits directors to avoid personal liability to the corporation for negligent acts, by the insertion of a provision in the Certificate of Incorporation.
78.2 As a corporate, or individual, yacht owner, a sales/use tax may be due, under certain circumstances, to the state of principal use.
78.3 You may also opt to own your yacht, as part of a group, when forming your Delaware corporation, as many of DBI’s clients have done.
78.4 When your Delaware corporation decides to sell its asset (your yacht), or the entire corporation, the corporation will pay the tax in the corporate name, not you, individually.
78.5 A Delaware corporation is sold by simply transferring the shares of stock in the corporation over to the new owner(s). This form of sale may be very attractive to a prospective purchaser because title to the yacht has not changed hands – it is still registered to the corporation. You should consult with a Delaware corporate lawyer and a certified public accountant, to determine if a tax on your yacht will be due in the state where your yacht is principally used. In some cases, no sales tax may be assessable on the transfer, and no re-registration costs are incurred.
78.6 Your yacht may be used for tax-deductible business entertaining. As with other income tax matters, the application of tax laws varies depending on an individual’s facts and circumstances.
78.7 Federal and Delaware law require that boats be registered in the State of principal use. When a vessel is actually numbered in another State of principal use, it shall be considered as in compliance with the numbering system requirements of Delaware, when it is temporarily being used in Delaware.
When a vessel is removed to Delaware as a new State of principal use, a number awarded by any other State shall be recognized as valid for a period of 60 days, before numbering is required by Delaware.
The key is waters of principal use. Should you use your boat on another State’s water more times than it is used in Delaware waters, you should register your boat in that State.
78.8 An excellent reference that provides comprehensive guidance for the business use of yachts, including the general rules for entertainment facilities, personal use, depreciation and recordkeeping for yachts, are two manuals, entitled Tax Guide for the Business Use of Yachts, Volume I and Volume II: Charter Operations, by Mike Kimball, CPA, Roger A. Smith, CPA, Dr. Karen S. Lee, J.D., CPA, available from Delaware Business Incorporators, Inc.
79. What are the individual advantages to forming a Delaware corporation, or Limited Liability Company (LLC), to own my aircraft? What about matters such as aircraft bank financing, insurance and appraisals? Do I have to register my aircraft with the State of Delaware?
79.1 If you are forming a Delaware corporation, or LLC, to own your aircraft for business purposes, these two forms of corporate ownership, provide you, and all other shareholders of the corporation, or members of the LLC, the best protection against personal liability.
79.2 When operating your aircraft as a business, and when certain procedures are followed, the owner is entitled to write off maintenance, fuel, hangar expense and depreciation (aircraft can be depreciated over a five-year life), and offer certain tax saving advantages. While all but depreciation is an out-of-pocket expense, the tax reduction that can be obtained is a real cost savings from federal income tax. You should consult both your accountant and your lawyer to help you reach an informed decision on the choice of aircraft ownership.
79.3 When purchasing your aircraft, you should consult experienced aircraft financing and insurance professionals.
79.4 No. You do not have to register your aircraft in the State of Delaware.
80. What is the U.S. federal Employer Identification Number (EIN) and how is it used?
80.1 An Employer Identification Number (EIN) is a nine-digit number that the U.S. Internal Revenue Service (IRS) assigns in the following format: 00-0000000. The IRS requires the number to identify taxpayers who must file various business tax returns. EINs are used by employers, sole proprietors, corporations, Limited Liability Companies (LLCs), partnerships, nonprofit associations, trusts, estates of decedents, governmental agencies, certain individuals, and other business entities. All U.S. banks require a business entity to furnish them their EIN, prior to opening a commercial account.
81. Why is a nonresident, non-U.S. citizen required to have a U.S. federal Employer Identification Number (EIN) for a Delaware corporation?
81.1 The EIN must be furnished to the IRS, when reporting the income, gains, losses, deductions, credits, and to compute the U.S. income tax liability of a foreign corporation.
82. What formalities are required to have my Delaware corporation’s documents legalized by my country’s embassy in Washington, D.C., and how long does it take?
82.1 First, you must have your corporate documents notarized by a Delaware notary, a service provided by DBI. Second, the Delaware Secretary of State must authenticate these documents. Third, DBI mails your documents to your country’s embassy in Washington, D.C. for formal legalization. The process normally takes four weeks, from the date of your initial request, to the date DBI sends them to you, via international courier.
83. What is a nominee director?
83.1 Many U.S. citizens and non-U.S. citizens, who are owners of Delaware corporations, prefer to remain as anonymous as possible. Employing the contractual services of a nominee director, for a corporation, offers you the ability to keep your name, as the director, unlisted on the Certificate of Incorporation and other legal documents. DBI offers the services of a U.S. citizen, to function as your nominee director, for your Delaware corporation.
84. How can I obtain and register a legal fictitious name in Delaware?
84.1 Using a legal fictitious name has long been a common practice by authors. It is called a “pen” name. You simply choose your “pen,” or fictitious name, which is different from your given name at birth. Your fictitious name must be registered with the New Castle County, Delaware’s Prothonotary’s office. Then your fictitious name can be used for corporate purposes, such as registering your Delaware corporation in other states, documenting your corporate records, and to sign checks, etc.
85. What is a Delaware shelf corporation?
85.1 It is a Delaware corporation, or Limited Liability Company (LLC), formed prior to the current year. They are available for sale by DBI. Costs begin at US$700, which includes a certified copy of charter, Corporate/LLC Information & Documentation Kit, and statement by incorporator.
86. How do I change my present Delaware Registered Agent to Delaware Business Incorporators, Inc.?
86.1 Since 1986, many U.S. and offshore owners of Delaware corporations and limited liability companies (LLCs) have made the wise choice to change their Delaware Registered Agent to DBI. DBI is one of Delaware’s leading corporation service companies, with a direct computer link to the Delaware Division of Corporations.
86.2 To change from your present Delaware Registered Agent to DBI, simply fill out the information on the DBI Change of Registered Agent Order Form, and fax or e-mail it to DBI. DBI will prepare the Certificate of Change of Registered Agent form and email it to you for your signature. Upon the return of your signed certificate, DBI will make the necessary filing with the Division of Corporations.
