Delaware is home to over 98,000 small businesses that account for 98.6% of the businesses in the state, employing 48.7% of Delaware's workforce. But Delaware isn't known for its small businesses. Rather the state is well-known as a preferred state of incorporation for venture-backed startups.
Renowned for its business-friendly policies, Delaware is a preferred location for businesses seeking favorable tax laws and legal advantages. As the corporate home to many Fortune 500 companies, the state offers a stable economic environment, efficient regulatory system, and proximity to major East Coast markets, making it an ideal choice for business incorporation and expansion. Delaware’s legal framework for businesses is among the most favorable in the country.
Here's a primer on how to start a business in Delaware.
Costs associated with forming a business varies by business entity type and by state the business was formed in. We aim to cover here the basic costs specific to the state for starting a business. We also touch upon other costs in order to stay compliant and continue to doing business in the state, such as paying various state taxes or complying with local minimum wage laws when hiring in-state.
We cover in broad strokes the following costs:
There are several types of business structures you can choose from when forming your business. Which is best for your business depends on a variety of factors, like ownership in the business, taxation, and more.
No State Filing: There are two types of structures which can be automatically formed without any filing with the state. Sole proprietorship and general partnership falls into this category, and they are a popular form of self-employment.
Formed or Incorporated: Three most common business entities that require some formation or incorporation with the state are corporation, limited liability partnership (LLP), and limited liability company (LLC). Each structure has its own one-time formation or set-up cost.
Delaware offers the basic entity types that businesses can choose from in any state when filing for a domestic entity setup: Corporation (the most popular entity type in the state, for profit and nonprofit distinctions), LP, LLP, and LLC. There are additional variations for each of these entity types as well as other structures, like public benefit corporations.
Licensed individuals may organize and become the shareholders of a professional corporation. The name of a professional corp must contain either a word or words descriptive of the professional service to be rendered by the corporation or should contain the last names of one or more of its present, prospective, or former shareholders or of persons who were associated with such. The corporate name ending must contain the words “chartered” or “professional association” or abbreviation “P.A.” A professional corporation name cannot include the words “company,” “corporation,” or “incorporated” or any other word, words, abbreviations, affix or prefix indicating that it is a corporation. Delaware does not have PLLCs.
Domestic and foreign entities can be formed predominantly online at the Delaware One Stop operated by Delaware’s Secretary of State. Follow their Requirements for a Delaware Business to form an entity.
Across all US states, the average cost of formation is roughly $100 with some states costing as little as ~$50 to create a corporation and some as high as $500+ to form an LLC.
Here are the formation costs (up to date at the time of this writing) for three most common entity types for businesses filed with the state:
Franchise taxes are state fees that businesses pay in order to have the right to operate in those states. They are paid in addition to state and federal income taxes. Failure to file can cause a business to lose its good standing with the state, making it difficult to operate, get loans, and may cost the business clients if clients require this information.
Here are the franchise tax fees for each business entity structure in this state as of the time of this writing.
Taxes, taxes, and more taxes. Although income taxes may seem far off concern when starting a business, the truth is that not withholding enough for income taxes is a material cost to business owners. Here we briefly cover state income taxes. For a better overview of self-employment taxes, you can read more on Small Business Tax Planning.
Pass-Through Entities: Pass-through entities are boon to small business owners. A pass-through entity is a business structure where income passes directly to the owners or investors, and they report it on their personal tax returns. This allows the business to avoid paying corporate taxes, making it a more tax-efficient option for small businesses. This also makes filing taxes significantly simpler as only one return is needed.
By default, sole proprietorships, LLCs, and partnerships are considered pass-through entities. In the case of LLCs, LLCs are usually referred to as disregarded entities. However, owners can choose to get their LLC be recognized and treated differently for tax purposes with the IRS.
Corporate Income Tax: Most states (44 out of 50) levy a corporate income tax.
C-Corps pay a C-Corp state income tax rate. If the income tax is pass-through, as with S-Corps, use your personal income tax rate.
Limited Liability Companies: For LLCs, the tax rate depends on the how you set up the LLC business structure.
Business owners who sell goods or services within a state are typically required to collect and remit state sales tax. Each state has different rules regarding what is taxable, so it’s crucial to understand the state’s specific requirements. Most businesses aren't at significant risk of non-compliance with sales tax until they reach the state's economic nexus threshold.
Economic nexus refers to the threshold of sales or transactions in a state that, once exceeded, obligates a business to collect sales tax, even if they don't have a physical presence there. Once a business achieves economic nexus, they must register with the state’s tax authority and start collecting sales tax on applicable sales. Failing to comply with these requirements can result in penalties and back taxes. Economic nexus is particular important when it comes to online sales for e-commerce companies.
If you're considering hiring employees for in-person work, then knowing your state's employment laws are important.
One important to factor is knowing the local minimum wage, which varies depending on state and sometimes even by city or county. Note that in addition to the hourly rate, employers should also consider payroll taxes, workers’ compensation insurance, and potential benefits costs.
Here we just provide a review in the table below costs specific to the state, namely the state's specific minimum wage, any applicable exceptions to the minimum wage, and recurring payroll taxes.
*Corporate Filing Fee Note: Filing fees are based on stock quantity, more information about fees can be found here and here.
General State Business License Note: Every business in Delaware needs a general state business license from the Division of Revenue. More information can be found in the First Steps portal.
All active Domestic Corporation Annual Reports and Franchise Taxes for the prior year are due annually on or before March 1st and are required to be filed online. Foreign Corporations must file an Annual Report with the Delaware SoS on or before June 30 each year. A $125.00 filing fee is required to be paid. All Domestic and Foreign Limited Liability Companies, Limited Partnerships, and General Partnerships formed or registered in Delaware are required to pay the annual franchise tax of $300, but there is no requirement to file an Annual Report. The annual taxes for the prior year are due on or before June 1st.
The Delaware Division of Small Business is a service-focused agency committed to supporting businesses starting and growing in Delaware. Small businesses can reach out to the Division for assistance in connecting to the resources and advice to succeed.
Business Entity Searches can be completed here.
Business names may be reserved for $120 day for a fee of $75.
Certificates of Good Standing can be accessed online for $10.
The idea of starting a business can be exciting, but the plethora of choices, jargon, and costs associated with the pure act of setting up a business with the state can be an unnecessarily daunting and time-consuming process.
Although this guide can't setup your business entity for you, it provides an overview so you can get a head start. We hope this article has sheds light on the essential costs involved and provides guidance on how to manage them effectively, setting you on a path towards entrepreneurial success.
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