By Robert C. Hackney
Incorporating in Delaware is pretty easy, but you don’t want to miss any steps along the way, so here is a step by step explanation of what you need to do.
Is it really a corporation that you want to start? Get with your lawyer and/or accountant and determine that a corporation is right for you. They might recommend that you form a limited liability company, or one of the many different forms of partnerships. That issue is not for this blog post, so we will assume you have already made the determination that you want to be a corporation.
For an overview of the different kinds of entities you can form in Delaware go to:
https://revenue.delaware.gov/services/Business_Tax/business_structures_table.pdf
The Delaware Division of Revenue also has a good chart showing you some of the steps you must take for different entities; you can see it at:
https://revenue.delaware.gov/services/Business_Tax/Step2.shtml
You will need a Registered Agent in Delaware. The two largest are CT Corporation, known as The Corporation Trust Company in Delaware (that represents over 285,000 corporations) and Corporation Service Company. We are not affiliated with either of them, nor do we get anything from them for mentioning them here, but they are the best known.
Their contact information is as follows:
The Corporation Trust Company
Corporation Trust Center
1209 Orange Street
Wilmington, DE 19801
New Castle County
(also known as CT Corporation System)
Ph: 302/658-7581
Fax: 302/655-5049
Website:
https://ct.wolterskluwer.com
https://ct.wolterskluwer.com/registered-agent-services
Corporation Service Company
251 Little Falls Drive
Wilmington, DE 19808
New Castle County
Ph: 800/927-9800
or 302/636-5400
Fax: 302/636-5454
e-mail: csrcontact@cscinfo.com
Website: www.cscglobal.com
There are many others who provide this service in Delaware, and they can be found at: https://corp.delaware.gov/agents/agts.shtml
Not a requirement, but you should reserve a name.
Remember, you can’t use a name that is already in use, so if you come up with a name you like, but you are not quite ready to jump in the start the company, you can reserve a name and hold it for 120 days. Reserve your name by going to this page:
https://icis.corp.delaware.gov/Ecorp/EntitySearch/NameSearch.aspx
Prepare your Certificate of Incorporation.
The Delaware Statute (Title 8 Section 102) tells you what needs to be included. Here is a summary:
• Name of the corporation which must include one of the following: association, company, corporation, club, foundation, fund, incorporated, institute, society, union, syndicate or limited, or some abbreviation of one of those – but not “bank” or “trust.”
• Name and address of the registered agent in Delaware;
• The nature of the business or the business purpose. The term “any lawful activity” is permitted.
• The stock structure of the company;
• The name and mailing address of the incorporator;
• And a number of other items that are not required by are allowed to be included. See Title 8, Section 102(b) for a list of these matters. Later we will discuss Section 102(b)(7) which is something that you will want to include.
Submit your Certificate of Incorporation.
You Certificate of Incorporation can either be mailed or faxed to the division of corporations.
The fax number for the Division of Corporations is 302-739-3812.
The mailing address is:
Division of Corporations
John G. Townsend Building
401 Federal Street, Suite 4
Dover, DE 19901.
All filing fees must be paid upon submission of your request. The fee for filing your Certificate of Incorporation is presently $89.00.
You may need certified copies of your incorporation papers – or not.
You can obtain a certified copy of your Certificate of Incorporation or a Certificate of Status from the Division of Corporations. Don’t do it unless or until you know you will need it. Delaware has a short form Certificate of Status, which confirms that you are an active corporation and in good standing, which costs $50.00 or a long form Certificate of Status for $175.000 which has a copy of your Certificate of Incorporation attached and certified.
Why would you need this? Typically, only for a bank when you are opening a bank account. If you plan to open a bank account in Delaware, check with the particular bank in advance and ask what they need. Sometimes banks just go online and check on your company, and you don’t need to spend the time and money getting a certificate. It depends upon the bank.
If you are incorporated in Delaware, but have no operations there, and you plan to open a bank account in the state where you are operating, you will need to file for authority to do business in that state as a foreign corporation. The bank will want to see that you have done that, and may also want your Delaware documents. Since you have to provide your Delaware documents to get your state of operation approval, the local bank may not need your Delaware documents. Once again, check with the bank as to their requirements before going there and trying to open a bank account for your company.
Annual Report and Annual Franchise Taxes
Don’t forget that by March 1 of each year, you must file your Annual Report. The costs for filing the Annual Report is $50.00, plus your Annual Franchise Taxes. In Delaware you pick between two different methods to calculate your franchise tax, the Authorized Shares Method and the Assumed Par Value Capital Method. There is a minimum charge for corporations using the Authorized Shares Method of $175.00, and a minimum charge for corporation using the Assumed Par Value Method of $350.00. For either method, the maximum franchise tax is $200,000.00, unless it has been identified as a Large Corporate Filer then their tax will be $250,000.00.
The Authorized Shares Method is a sliding scale based on how many shares are authorized in your Certificate of Incorporation. Please note that a corporation that has no par value stock will always use the Authorized Shares Method since it results in the lower tax.
The Assumed Par Value Capital Method is a combination of information about the number of authorized shares, the number of issued shares and the total gross assets. When you use this method, you will give the numbers for all issued shares and the total gross assets of the company based on what the company listed on its tax return.
That is easy enough to understand. It gets complicated when you then try to apply the rules and calculate the franchise tax.
Notification of Annual Report and Franchise Taxes due are sent to all Delaware Registered Agents in December of each year. Delaware has mandated electronic filing of domestic corporations Annual Reports.
Modify the Basic Certificate of Incorporation
While the Delaware Secretary of State can provide you with a basic form for your Certificate of Incorporation, you need to add some important clauses to the form.
Exculpatory Clauses
You have an option to add certain things to your Certificate of Incorporation, and for me, the most important addition is the one allowed by Title 8, Section 102(b)(7).
Most importantly, subsection (b)(7) says that you can include the following:
“(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director’s duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. All references in this paragraph to a director shall also be deemed to refer to such other person or persons, if any, who, pursuant to a provision of the certificate of incorporation in accordance with § 141(a) of this title, exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title.”
This is typically included in the Certificate of Incorporation by adding a paragraph that says the following;
“No director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law, (i) for breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment.”
Note: the reference to Section 174 means that a director is still liable for any improper dividend that was paid or for the unlawful purchase or redemption of any stock of the company.
The purpose of this clause is to prevent liability for a director when there may have been a breach of fiduciary duty, but it was not an intentional breach of the director’s duty. This clause assists the company in attracting directors by clarifying that they are not liable for unintentional acts.
The division of corporations has sample forms to help you with your incorporation, which can be found at:
https://corp.delaware.gov/newentit09.shtml
Adding Different Classes of Stock
When drafting your certificate of incorporation, you will be considering how many and what kind of classes of stock you want to create for your company. While you can even vary the types of Common Stock, and the variations in classes of stock are mind boggling, you should at least consider creating a class of preferred stock for your company.
I once represented a company that had someone helping them who was allegedly an “investment banker.” He was licensed and work for a big brokerage house, so you would think he was not clueless, but you would be wrong. He was curious to know why we created a class of preferred stock. Here is what I told him:
You are allowed to create something that most people call a “blank check preferred stock class.” All this means is that when you create it in the Certificate of Incorporation, it just says “X shares of preferred stock” and does not describe anything about the actual preferences that the preferred stock will carry. That is because you reserve to the directors the right to create those preferences to meet the circumstances at the time of need. By that I mean, for example, that one day you may get an opportunity to buy a smaller company, and some if not all, of the consideration can be paid in preferred stock. The Board can then set specific preferences for a special series of stock that will be issued to the shareholders of the company you will acquire, and those preferences can be negotiated the way you would negotiate the terms of any transaction.
Maybe you have a total class of 5,000,000 shares of preferred stock, and you decide you will create 100,000 shares of a new series within the class of preferred called “Series A 5% Convertible Preferred Stock.” It will have a preference on liquidation over the Common Stock, pay a 5% dividend, and be convertible into common stock on some fixed formula if the company is sold or goes public. What is does is give you flexibility, and give you another way to use your stock of your company as money.
Indemnification of Officers and Directors.
It is permissible to provide for indemnification of officers and directors of a Delaware corporation. In addition to the exculpatory clause for unintentional breaches of fiduciary duty, a company will typically want to include an indemnification clause as protection for its directors.
What does an indemnification clause cover? Under Delaware law (Section 145(a) and (b) of the Delaware General Corporation Law) a company can indemnify not only directors and officers, but employees, for costs which are incurred in connection with proceedings (court or administrative) that arise “by reason of the fact” that such person is or was a director, officer or employee.
A Delaware corporation is also allowed to advance costs and expenses for such proceedings, but is not required to do so unless there is a contract or a bylaw that specifically states that costs and expenses will be advanced. To attract directors, this is also a suggested clause.
In a case decided in the Delaware Court of Chancery in 2016, the Court held that the right to indemnification, and the right to have costs advanced (if provided for previously), continue after the person has left their office as an officer or director, as long as the actions complained of took place while they were in office. The Court also held that these rights could not be amended after the person left office, unless the original grant to rights provided such amendment when granted. In addition, these rights do not cover any actions that the person may have taken after that person left their official capacity. (Marino v. Patriot Rail)
The following is a basic example of an indemnification clause. Once again, this is just a sample of a simple clause to give you insight into what some companies include in their Certificate of Incorporation. It is not provided so that it can just be copied and used without a full review of your own situation:
“The Corporation agrees to hold harmless and indemnify the directors, officers and employees of the Corporation to the fullest extent authorized or permitted by the provisions of the Charter, the Bylaws and the DGCL, as the same may be amended from time to time.
In addition, the Corporation further agrees to hold harmless and indemnify such directors, officers and employees against any and all expenses (including attorneys’ fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that such person becomes legally obligated to pay (including any federal, state or local taxes imposed on such person as a result of receipt of reimbursements or advances of expenses under this Agreement) because of any claim or claims made against or by him or her in connection with any threatened, pending or completed action, suit or proceeding, including any appeal and the premium, security for, and other costs relating to any costs bond, supersedes bond, or other appeal bond or its equivalent, whether civil, criminal, arbitrational, administrative or investigative, whether formal or informal (including an action by or in the right of the Corporation), to which such person is, was or at any time becomes a party or a witness, or is threatened to be made a party or a witness, by reason of the fact that such person is, was or at any time becomes a director, officer, employee or other agent of the Corporation, or is or was serving or at any time serves at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise.”
The following is a basic example of a clause providing for the advancement of expenses in connection with any proceeding against a director, officer or employee. As we stated above, it is not necessarily the language that you will use, but is provided to let you see what some companies have inserted into their Certificate of Incorporation:
“Advances of Expenses. The Company shall advance the expenses incurred by Indemnitee in connection with any proceeding, and such advancement shall be made as soon as reasonably practicable, but in any event no later than 30 days, after the receipt by the Company of a written statement or statements requesting such advance or advances from time to time. Advances shall be unsecured and interest free and made without regard to Indemnitee’s ability to repay such advances and without regard to whether Indemnitee may ultimately not be entitled to indemnification from the Company. Indemnitee’s right to such advancement is not subject to the satisfaction of any standard of conduct. Such advances are intended to be an obligation of the Company to Indemnitee hereunder and shall in no event be deemed to be a personal loan. The right to advances under this section shall in all events continue until final disposition of any proceeding, including any appeal therein. This Section shall not apply to the extent advancement is prohibited by law as determined by a court of competent jurisdiction in a final adjudication not subject to further appeal.”
These three areas, the exculpatory clause for personal liability, the addition of different classes of stock and the indemnification provisions are the key sections that need to be added to every basic Certificate of Incorporation for a new Delaware corporation.