A Delaware company is a US legal entity (most often an LLC or a C corporation) formed under the law of the State of Delaware. The state is chosen for its well-developed corporate law and its familiarity to investors; at the same time, the company owes annual payments to the state and has federal tax obligations. Russian-language roundups sometimes list Delaware alongside offshore jurisdictions, although it is an ordinary US company that pays state fees and is subject to US tax rules.
LLC or C-Corp
A C-Corp is usually chosen by startups that plan to raise venture capital and issue different classes of shares and employee options. A corporation is a separate taxpayer at the federal level.
An LLC is more convenient for a small business with one or several owners and no plans for a venture round. Under IRS rules, a single-member LLC is by default “transparent” for federal tax purposes, and one with two or more members is treated as a partnership; a different treatment is elected on Form 8832. For a foreign owner of a single-member LLC, this means a separate information reporting obligation, Form 5472, covered in detail in the article US LLC for non-residents.
It is better to choose the form before the founders sign their agreements: shares, vesting, the cap table and the taxation of distributions work differently in an LLC and a corporation, and switching from one form to the other costs money and time.
Registered agent and formation documents
Delaware company formation starts with choosing a registered agent: the state’s LLC law (6 Del. C. § 18-104) requires every LLC to maintain a registered office and a registered agent in the state at all times. The office need not be the place of business: it is the address for official correspondence and service of process. Internal rules are set out in the operating agreement, and for a corporation, in the bylaws and board resolutions.
Annual payments to the state
LLC. Every LLC formed or registered in Delaware pays an annual tax of $400. The deadline is June 1 for the previous year. Late payment incurs a $200 penalty and interest of 1.5% per month on the tax and penalty.
Corporation. The annual report and franchise tax are filed by March 1. The annual report fee for a regular corporation is $50. The minimum franchise tax is $175 under the Authorized Shares method and $400 under the Assumed Par Value Capital method; the maximum is $200,000 ($250,000 for Large Corporate Filers). The calculation method has a large effect on the amount: for a corporation with a large number of authorized shares, the tax under the first method may be noticeably higher than the minimum, so the calculation is worth checking before filing.
Federal taxes and the owner’s taxes
Delaware determines the corporate law and payments to the state. Federal taxes depend on the company’s form and classification, its sources of income and the connection of its activities with the US. The owner separately needs to check their tax residency, the controlled foreign company (CFC) rules in their country and the taxes on distributions of profit.
Bank and payment service providers
The bank and the payment provider assess whether the business is real: the owners, contracts, website, client profile and source of funds. A Delaware certificate confirms that the company exists, and the financial institution decides whether to serve it based on its own risk assessment. For SaaS projects, it is useful to check acquiring requirements in advance: see the article on the jurisdiction for a SaaS company.
Example
Three founders are building a B2B SaaS and preparing a seed round. Venture funds usually expect a C-Corp, and an LLC would have to be converted before the deal. The decision is made in this order: the requirements of investors and clients, the tax model for the founders, the bank and acquiring, and only then the filing of documents.
Five questions before you pay
- What does the service include: registration, registered agent, EIN, operating agreement or bylaws, accounting?
- Which payments to the state fall in the second year, and on what dates?
- Which federal forms will the company file given your ownership structure?
- Which bank or PSP works with similar companies?
- Which taxes arise in the owners’ country and in the country where the team works?
A scenario comparison of Delaware and Wyoming is in the article Delaware vs Wyoming, and a separate review is in Wyoming LLC.
If your clients are mostly in the UK, compare the American form with the British one in UK LTD or US LLC.
Offshora will calculate the two-year cost of owning a company in Delaware and the alternatives. Send us the owners’ country of residence, the type of business, the clients’ geography and the expected payments. We handle registration and ongoing support under the company formation and maintenance program.
Tell us about your task, and we will propose a jurisdiction, the scope of services and the order of work.
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