DelawareIntroduction to 4 Types of Delaware Corporations

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Are you thinking of starting a business in Delaware? Due to the nation’s legal and liability protection of established corporate laws provided to Delaware companies, coupled with attractive tax benefits, it is no wonder that Brazil is a leading jurisdiction to set up a business. Prior to setting up a business in Delaware, it is necessary to register company in Delaware first. Therefore, whether you are an aspiring entrepreneur or an experienced business owner, we will explore what are the 4 types of Delaware corporations

Delaware offers different types of corporations for you to choose from, where each corporation caters to different types of business activities. Foreigners who wish to operate business in Canada can choose between these 4 corporations. This includes General corporation, Close corporation, Public Benefit corporation and Non-Profit corporation. 

Before you register business in Delaware, it is crucial to fully understand your business model before choosing the most suitable business entity. Some considerations you should take into account include the type of business activity, tax obligations as well as potential personal liability.

1. General corporation 

The Delaware general corporation, also known as C-corp, is the most common type of corporation in Delaware and it is appropriate for most active small and large businesses. C-Corp’s popularity among business owners can be attributed to its ability to go public and raise capital by means of selling shares of company stocks. Additionally, C-corp is utilised for businesses who wish to obtain venture capital funding. It is recommended for you to set up a C-corp if you are a foreigner looking to do business in Delaware. 

The general corporation has a three-tier formal structure which consists of stockholders, directors, and officers. 

Stockholders

While stockholders are the owners of the company, the management of the company is not controlled by them. Corporations are owned by stockholders through shares of common stock. Holders of common stocks have voting rights and receive one vote for each share of stock they own. They can elect the company’s board of directors and are able to vote on the company’s major matters, such as selling the corporation. Shareholders who own a majority of shares of issued stock are referred to as majority shareholders. They are able to control the company, while having greater responsibility and influence than minority shareholders.

Directors

Unlike shareholders, directors are responsible for the corporation’s overall management and they make major strategic decisions in the corporation’s interests. Directors are elected by the majority vote of shareholders of the corporation. Therefore, majority stockholders have the ability to remove and replace directors as they have the majority of shares of issued stock. 

The Board of Directors determines when to declare dividends and how much dividends are given to shareholders of the corporation. Directors hold periodic meetings at least once every year and appoint officers who are employees of the corporation.

Officers

Officers are responsible for the day-to-day running of the corporation’s operations and work for the Board of Directors. They carry out the decisions of the Board of Directors and implement the Board’s policy. Officers are usually the President, Vice President, Secretary and Treasurer. 

Difference between C-Corp & S-Corp

  • The key difference between C-Corp and S-Corp lies in their taxation systems. 
  • A C corporation refers to any corporation that is taxed separately from its owners. Typically, for-profit corporations are classified as a C corporation. This default classification is not limited by the number of shareholders.
  • Meanwhile, S corporations are taxed specially and may benefit from certain tax advantages. As pass-through taxation entities, no income tax is required to be paid at the corporate level. Instead, profit or losses are reported as part of the owners’ personal tax returns. Any tax is thus paid at the individual level by the owners. This way, S corporation owners are not doubly taxed.
  • As all corporations start out as C-Corporations for tax purposes, corporations may choose to be taxed as an S-Corporation later on. They will have to file a “Subchapter S” federal tax election (Form 2553) within 75 days of incorporation or 75 days of the beginning of the calendar year. To qualify as a S corporation, there is a restriction on the number of shareholders and can have no more than 100 shareholders. Shareholders are also required to be citizens or residents of the United States.

2. Close corporation

A close corporation is a type of venture where directors, shareholders and officers are usually the same people. Close corporations in Delaware are limited to no more than 30 shareholders and there are restrictions on the sale or transfer of stock. The company is run by shareholders and does not require a Board of Directors. Close corporations may be structured and run like partnerships, with all corporate benefits. 

Unless the close corporation applies for S-Corporation status from the IRS, the close corporation will be taxed as a C corporation. This means that the corporation’s income may be subject to double taxation.

Close corporations are frequently used for small, tight-knit business groups, family ventures, companies that want less formal proceedings and restrict the transfer of stocks. However, it is recommended for individuals who do not want the formalities of a general corporation to set up a Limited Liability Company instead.

3. Public Benefit Corporation

Public Benefit Corporations are formed to achieve a business purpose while expressing one or more public benefits it intends to pursue. The public benefit should be specific enough to locate the cause but general enough to allow future growth in solving the public issue. The public benefit will be reviewed by the Delaware Secretary of State before it is approved. 

Public Benefit Corporations not only maximise its profits, it also aims to serve broader societal interests for the benefit of the environment and society. Moreover, it is mandatory for the Board of Directors to provide stockholders a statement of the corporation’s public benefit and the corporation’s progress in achieving it at least once every 2 years.

A Delaware Public Benefit Corporation can be formed in the same way as a corporation by filling a Certificate of Incorporation with the Delaware Division of Corporations. The Certificate of Incorporation has to be clearly marked to indicate that it is a Delaware Public Benefit Corporation.

4. Non-Profit Corporation

Non-profit corporations are non-stock corporations and are eligible to obtain non-profit status under Section 501(c)(3). To obtain tax exemption, a corporation has to first form a non-stock corporation, apply to the Internal Revenue Service (IRS) and submit IRS Form 1023 within 15 months of the date of incorporation. Once the tax exemption is granted, the corporation does not have to pay U.S federal income taxes.

Non-profit corporations do not issue stocks and hence do not have shareholders. Additionally, non-profit corporations are controlled by members who elect the Board of Directors to run the corporation. Business activities are restricted for non-profits and profits earned stays in the corporation for charitable purposes.

Non-Profit Corporations are frequently used for non-profit organisations (charitable & religious organisations), homeowners associations, political organisations, trade associations and community organisations.

Delaware company registration is hassle-free if you are familiar with the entire incorporation process. Tetra Consultants strives to provide our clients with a seamless experience when setting up a company in Delaware. Our team of experts will ensure that your Delaware company can be operationally ready as soon as possible

Tetra Consultants

Tetra Consultants is the consulting firm that works as your advisor and trusted partner in your business expansion. We tell our clients what they need to know, instead of what they want to hear. Most importantly, we are known for being a one-stop solution for our valued clients. Contact us now at enquiry@tetraconsultants.com for a non-obligatory free consultation. Our team of experts will be in touch with you within the next 24 hours.

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