Corporations are one of the many business entities in the United States. Corporations are separate tax entities from their owners, and the owners are called shareholders. There are various methods in how shares can be held in a corporation. Whether they are held by only a few individuals or offered publicly for trade in the stock market.
There are also non-stock corporations that can be founded with the purpose of a non-profit or a for-profit business. All of these different options allow the corporation to enter contracts, loan and borrow money, as well as hire employees, and be sued. The formation of the corporation always correlates with specific taxation regulations.
How Delaware Corporations Work
The process of starting a corporation is called "incorporating". Typically you will want to work with a lawyer when incorporating because, as compared to an LLC, it is somewhat of a complicated process.
There are a huge number of documents that must be prepared and filed properly. These include:
- Filing articles of incorporation in Delaware
- Adoption of corporate bylaws
- Assign a board of directors
- Plan org minutes
Corporations have a specific structure that must be followed. First off, there is always a board of directors at the highest level. This board must create policies and manages oversights.
Overall, the board is in charge of ensuring that the corporation is acting in accordance with the purpose and mission outlined in the articles of incorporation. The board also ensures that the corporation complies with federal, state, and local rules and regulations.
Below the board are the corporate executives. These executives run the daily routines of the business. Often these individuals are also shareholders and can even sit on the board of directors. Executives are always paid employees of the corporation.
Corporations always reserve the right to create their own stock structures. This often results in double taxation, once for the business, and then again of the shareholder’s income. Double taxation is one of the most prominent downsides of forming a corporation.
Why Start a Corporation?
There are many reasons why you might choose to form a corporation. Having a corporation can allow you to appear more professional. It can also provide you anonymity under that same guise.
Because corporations are independent of their owners, taxes are done in an alternative manner. Corporations are able to own property, enter contracts, sue, and borrow money on their own. They will also be required to file their own taxes.
Different Types of Corporations in Delaware
The two basic types of corporations are those with stock and those with no stock. Corporations can also be non-profit organizations.
When choosing to be taxed as a Subchapter S corporation, profits are taxed when they are passed down to shareholders. The shareholders will then need to report those profits and deductions on their own personal returns. S corps do not suffer from dual taxation.
There are specific guidelines when it comes to forming as an S corp:
- Must be a domestic corporation
- Cannot have more than 100 shareholders
- Shareholders must be individuals, trusts, or estates
- May not include partnerships, corporations, and non-resident shareholders
- May only have one class of stock
If a corporation does not meet the requirements of an S corporation, it will be taxed as a Subchapter C corporation. C corporations struggle with the issue of double taxation. The corporation will be taxed on its profits, and then the shareholders will be taxed on their dividends of the profits. C corporations are also not able to claim a deduction for profits passed on to shareholders.
If a corporation has shares held by religious organizations, in retirement accounts, or by education institutions, then they are considered non-profit. This allows these organizations to maintain no tax liability.
Advantages of Delaware Corporations
Corporation owners are only liable for the amount they invested because corporations are their own legal entity. Creditors and lenders cannot approach owners for their assets, regardless of any payments owed by the shareholders.
If you form a corporation anonymously you will be afforded privacy under your corporation. This provides the ability to act on the corporation’s behalf, without any link to your personal life.
Stockholders, shareholders, or members are the owners of a corporation. Should any of these members pass away, or be unable to perform their duties, it does not affect the corporation.
Easy Transfer of Ownership Shares
Because publicly held corporations do not require approval from other stockholders to sell shares, it makes it incredibly easy to attract new owners. Stocks and shares can be traded in the market, regardless of their volume, which allows the company to grow on its own and source additional funds.
Even though investors or owners may not directly handle day-to-day business operations, a corporation allows for competent management. Since owners vote for a board of directors, there will always be a professional management team.
Disadvantages of Delaware Corporations
- Incorporation costs: It is often more costly to go through the process of incorporation than it is to form a sole proprietorship or partnership.
- Double taxation: With a corporation, there are taxes taken from both the corporate earnings and from payments of dividends to shareholders. Because two taxes are remitted, there is more monetary value that goes to taxes.
- Maintenance: As compared to an LLC, there is a lot of documentation and maintenance required with a corporation. Along with the articles of incorporation, companies must file a variety of other documentation, including annual reports and tax returns. Corporations must also maintain good accounting records, licenses, and other important documents.
Should You Start a Corporation in Delaware?
Forming a corporation in Delaware allows for personal liability protection, and the ability to have business security and continuity. Especially if you are looking to have easier access to capital, choosing to incorporate verses form an LLC makes sense. If you are a single person or partnership, you may choose to form an LLC to avoid double taxation and the need to follow rigid formalities and protocols.