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STARTING AND OPERATING A BUSINESS IN DELAWARE Copyright © 2009, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION Delaware has a tax and legal structure that has for many years been designed to attract businesses to the state, and which has been very successful in doing so. In addition to a generally favorable tax structure and business climate, with no state or local sales tax, Delaware has always been in the forefront in developing pro-business features in its corporate laws. Because it also offers very favorable tax treatment for companies headquartered elsewhere, many of the largest firms in America have chosen this small state as their state of incorporation. In fact, Delaware is the corporate home to some 250,000 companies, to 58% of the Fortune 500, and to 68% of the 50 largest U.S. companies. Delaware is a small state, small enough that it could fit comfortably into Yellowstone National Park, with room left over for the entire state of Rhode Island. It has a population of 830,000 according to the last census, making it the sixth least-populous state. The state has only three counties: New Castle, Kent, and Sussex, with New Castle being the most densely populated. All of the cities and towns in Delaware are independent, incorporated municipalities. Delaware is strategically located for businesses, with easy access to the major metropolitan areas of the Northeast, just an hour and a half away by car from both New York and Washington, D.C., and even closer to Philadelphia and Baltimore. Like most states, Delaware imposes an income tax, a franchise tax on corporations, and various excise taxes, with property taxes imposed at the local level. Unlike most other states, however, Delaware has no state or local sales taxes. In addition, there is no state or local property tax on tangible or intangible personal property. A 2005 study by the Tax Foundation found Delaware had the third-lowest taxes of any state, as a ratio of per capita income, with only Alaska and New Hampshire having lower ratios. The Massachusetts Taxpayers Foundation study of state taxes in 2004 (based on 2002 data) found that Delaware had the second-lowest property taxes in the nation, in relation to residents' income, at just under $16 of tax per $1,000 of income. Alabama had the lowest property taxes, at $13 per $1,000 of income and, in comparison, Maine had the highest property taxes, at $55 per $1,000 of income. Delaware has also recently created a new type of corporate entity, called a Delaware Headquarters Management Corporation, or "HMC," to attract investment management firms and headquarters support operations, in order to increase employment in the state. The new HMC entity is subject to a reduced tax rate of only 4% on its investment income, and is granted numerous tax credits that may reduce its income tax by as much as 99% (but not below a minimum annual tax of $5,000). An HMC is also exempted from the General Service license and the Delaware gross receipts tax. Until recently, the state's economy was quite robust, in terms of the level of unemployment and other economic measures. For example, in December, 2007, the state's unemployment rate was only 3.5%, but since has risen sharply to 6.2% in December, 2008, but was still well below the national unemployment level of 7.2%. To view the latest federal Bureau of Labor Statistics unemployment rate data for Delaware or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Delaware can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity, except for the portion of income that is allocable to non-resident shareholders. Delaware also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section VI below. (b) Sole Proprietorships. In general, sole proprietorships in Delaware can be established with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and at least one state license, as well. Any type of business, including a sole proprietorship, may be subject to the Delaware gross receipts tax, but most small businesses will be exempt from this tax, as discussed in Section IV(d). No separate tax form filing is required, generally, for a sole proprietorship, under the Delaware income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the Delaware income tax and filing requirements for individuals. Doing business as a sole proprietor in Delaware is generally much simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, or obtain workers' compensation coverage for yourself. However, if your sole proprietorship operates under an assumed or fictitious business name (trade name), it will be required to register the name with the county or counties where you do business, as discussed in Section IV(g). (c) Partnerships. Delaware's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, in general. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions) and for a limited liability limited partnership (LLLP), which is a limited partnership that also elects limited liability partnership status. Partnerships, as entities, are not subject to state income tax in Delaware. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). Partnerships are required to file an annual tax information return with the state. For details on Delaware partnership tax return filing requirements, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in Delaware can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will typically be necessary to obtain one or more local business licenses from cities or counties in which you operate and one or more state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. While not required to do so, general partnerships may choose to file a Statement of Partnership Existence with the Delaware Secretary of State. Such a statement gives public notice as to which partners in the partnership are authorized (or NOT authorized) to act on behalf of the partnership in regard to specified matters such as real estate transactions. The fee for filing is $100, and a $250 fee or tax must be paid thereafter for each year a State of Partnership Existence remains in effect. The annual tax is due and payable to the secretary of state by June 1 following the end of the calendar year in which such statement is in effect or upon cancellation of the statement. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Delaware law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a Certificate of Limited Partnership with the Delaware Secretary of State, plus filing fees of $200. The same fees are applicable for registering a foreign limited partnership. Limited partnerships must pay an annual franchise tax or fee of $250 by June 1 of each year. A limited partnership that is also an LLP (a LLLP) must pay the same fees as other LLP's, of $200 per partner, up to a maximum annual fee of $120,000. For information on limited partnership filing requirements, see the contact information for the offices of the Delaware Secretary of State, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a new form of partnership permitted under the laws of Delaware. Somewhat like an LLC, an LLP provides a degree of limited liability for its owners, while retaining the tax advantages of a partnership for federal and Delaware state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. Partners in a general partnership or the general partners in a limited partnership can obtain a significant degree of limited liability by simply registering the partnership with the state as an LLP. To form an LLP in Delaware, you must file a registration fee and pay a filing fee of $200 per partner, up to a maximum of $120,000 (the same as the maximum corporate franchise tax). PLANNING POINT: Foreign LLP's, those created under the laws of another state, must register with the Delaware Secretary of State and pay the same fees as a domestic LLP. Both domestic and foreign LLP's must file annual reports each year and pay the same $200 per partner fees that apply when filing the initial statement of qualification (domestic LLP) or statement of foreign qualification (foreign LLP). As several other states have done, Delaware has enacted legislation that allows a limited partnership to also become a limited liability partnership -- a limited liability limited partnership, or LLLP. An LLLP is like a regular limited partnership, except that the general partners in the LLLP are given the same liability protection as partners in an LLP. An LLLP pays the same initial and annual report fees as other LLP's, of $200 per partner, limited to $120,000 a year. For more information on LLP registration and reporting requirements, see the contact information for the offices of Delaware Secretary of State, Division of Corporations, listed in Section VI(a). Note that one potential drawback of LLP's, if you will do business in other states besides Delaware, is that some states, like California and New York, only recognize certain types of professional partnerships as LLP's. Such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. (d) Corporations. To form a corporation in Delaware, you must file articles of incorporation with the secretary of state and register the corporation with the county clerk in the county where the corporation is located. State filing fees for incorporation are based on the amount of the company's authorized capital stock, with differing rates for par or no-par value stock. There is a minimum fee or tax of $15, plus filing fees. There are also small recording fees charged by the respective county clerks, of $15 plus $9 per document page. The total minimum fee to incorporate in Delaware is $89, which includes the state fees, municipality fee and county recording fee for a one-page document. Add $9 for each additional page, and the fee or tax can also increase if more than certain small numbers of shares of stock are authorized. The fees based on authorized capital stock begin at 2 cents per share on the first 20,000 shares for par value stock, or 1 cent per share for no-par value stock. These rates are reduced by half for the next 180,000 shares (or the next 1,980,000 shares of no-par value stock), and are 2/5 of a cent per share (for either par or no-par stock) on each authorized share in excess of 200,000 shares (par value) or in excess of 2,000,000 shares (no-par value). For par value stock, each $100 unit of the capital stock is counted as 1 taxable share. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of qualification before it may legally conduct business in Delaware, by filing an application for a certificate of qualification and paying an entrance fee of $160. If your business incorporates or qualifies to do business in Delaware, you must maintain an office or have a registered agent in Delaware -- a post office box is not sufficient. For more information on filing articles of incorporation or applying for a certificate of qualification to do business in Delaware, see the contact information for the offices of the Delaware Secretary of State, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file annual reports with the Delaware Secretary of State and, in the case of a domestic corporation, pay a $25 fee and franchise tax that can range from $75 to $165,000, depending on the amount of authorized stock of the corporation. Beginning with the 2007 annual report, due March 1, 2008, Delaware has made electronic filing mandatory. In the case of a foreign corporation, a $100 fee is required with each annual report. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter, in addition to late filing penalties. Note that foreign corporations are not required to pay the Delaware franchise tax that applies to Delaware corporations, but are required to pay the annual report fee of $100 per year mentioned above. Effective since August 1, 2003, all corporate filings with the Delaware Secretary of State must be accompanied by a $20 courthouse municipality fee. In addition to paying federal income taxes on its income, a corporation that does business in the state must file Delaware corporate income tax returns. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. For tax forms and more information on corporate income and franchise taxes in Delaware, see the contact information for the offices of the Division of Revenue and the Division of Corporations -- Secretary of State, respectively, listed in Section VI(a). Delaware is a very popular place to incorporate, for businesses that operate in any state, including those that do not operate in Delaware. Some of the advantages of incorporating in Delaware include the following:
(e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Delaware recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment, where all the shareholders are Delaware residents. However, where any of the shareholders on the last day of the taxable year are non-residents, the corporation must pay Delaware income tax on their share of the corporate income. (f) Limited Liability Companies. Delaware, like every other state, has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Delaware may also choose to operate in the form of an LLC. In most states, LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLC's under Delaware tax laws. To form an LLC under the laws of Delaware, one or more authorized persons must file a certificate of formation with the Delaware Secretary of State, which must be accompanied by a filing fee of $90. A Delaware LLC may now be formed with only one member. Foreign LLC's, those formed under the laws of another state, must obtain a certificate of authority to do business in Delaware, by filing an application with the Delaware Secretary of State and paying a filing fee of $100. In addition to initial filing fees, an LLC formed in Delaware or a foreign LLC must subsequently file annual reports and pay an annual tax of $250. Effective since August 1, 2003, all LLC filings with the Delaware Secretary of State must be accompanied by a $20 courthouse municipality fee. Under the Delaware Limited Liability Company Act, a limited liability company agreement may establish or provide for the establishment of one or more designated series of members, managers or limited liability company interests having separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations. Any such series may have a separate business purpose or investment objective. This provision, in effect, allows a single "series LLC" to be set up with multiple divisions or "series," each of which can function like a separate legal entity, as long as separate accounting is done for each. Thus, each such "series" may contain a separate business venture, whose losses or bankruptcy will be walled off, in terms of liability, from the other such divisions of the "series LLC." In addition, some tax advisors believe such a single LLC can be set up in place of multiple LLC's and thereby save significant amounts of state taxes in some states where each LLC is subject to special taxes or fees. However, note that California, which imposes a $800 minimum franchise tax and an "LLC fee" on every LLC that does business in California, has already announced that it will treat each Delaware "series LLC" as a separate LLC entity, subjecting each to the minimum franchise tax and LLC fee, so this approach will not work in California. However, some legal experts warn that this new Delaware law is relatively experimental and is untested, and, therefore, it is unclear how such a "series LLC" will be treated for tax and liability purposes by other states than Delaware, or by the courts or the Internal Revenue Service. CAUTION: For more information on LLC's and on filing articles of organization for an LLC, see the contact information for the offices of the Delaware Secretary of State, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should handle for you before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Delaware is one of the business-friendly states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in Delaware. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. (There are no state or local sales taxes in Delaware.) If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Delaware, there is no specific procedure for obtaining a tax release for unemployment tax, gross receipts tax, or unpaid withholding taxes of the seller. Accordingly, you will need to carefully examine the seller's records and tax filings to ensure that all tax returns have been filed and the taxes shown have been paid. You may also want to hold back part of the sales proceeds in escrow to offset against any unpaid taxes of the seller for which you may be held liable as a transferee. Note that you can request a list of delinquencies from the Delaware Department of Labor, Division of Unemployment Insurance, to see if the seller is known to be delinquent on any payments of unemployment taxes. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, you and the seller will need to (jointly) file Form UC-411, Application for Employment Experience of Predecessor, on a timely basis with the Division of Unemployment Insurance, Delaware Department of Labor, requesting that you be treated as a successor employer. PLANNING POINT: EXAMPLE: IV. DELAWARE TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General. Delaware has a generally very favorable tax and regulatory climate for businesses. In addition to a fairly low individual income tax rate (which has, after recent cuts, dropped below 6% in the highest bracket), there is no state or local sales tax, and no state or local property tax on either tangible or intangible personal property. However, there is a small Gross Receipts tax on all businesses, as discussed in Section IV(d), although most small businesses are exempt, as the tax generally applies only to gross receipts in excess of $80,000 a month, in 2008 ($1 million a month for manufacturers). Delaware is a favorite state for incorporation by many large companies. However, the state imposes a relatively high (8.7%) income tax on corporations, and also imposes an annual franchise tax, based on the amount of their authorized capital stock, on domestic (Delaware) corporations. However, the franchise tax does not apply to foreign corporations that do business in Delaware but are not incorporated there. For state tax forms and tax information, see the contact information for the Delaware Division of Revenue in Section VI(a). (b) State and Local Licensing. Nearly any business, operated anywhere in the United States, will have to have at least one government license of some kind. In most cases, this will be a local license, issued by your city or county. Before you open your business, contact your local city or county hall and find out if your particular business needs one or more local licenses. Most kinds of local business licenses are granted upon payment of a fee, with no further requirements, except possibly for annual or other periodic renewal fees. However, if you are engaging in any kind of food business, you will usually need to also obtain a health department permit and show that you are in compliance with health department food-handling requirements. In addition, be sure to check with an attorney or local government zoning or planning department officials to determine if your business will be in compliance with all local zoning and planning restrictions. If you own or rent any type of facility, you will generally need fire department permits, showing that you meet fire safety codes and any construction or improvements to an existing structure will usually require a building permit. If you intend to simply operate your business from your home, you may be in violation of local zoning requirements, but this is less likely to be a concern if you don't have clients, customers, suppliers, or employees coming to your house on business, on a regular basis. COUNTY ZONING AND LAND USE RESTRICTIONS Each of Delaware's three counties also imposes various regulations on businesses that will operate in that county. New Castle County permits business activities to principally occur in office, commercial and industrial zoning districts. Before commencing a new business activity, the proprietor should contact the Department of Land Use at (302) 395-5400, to ascertain whether the activity is permitted. A New Castle County contractor registration or license is required of proprietors of construction and construction-related businesses. The Department of Land Use will provide a zoning certification for a $50 fee. The Licensing Division issues contractor registrations, contractor licenses and occupancy or use certifications, depending on the proposed activity. New Castle County jurisdiction is limited to the unincorporated areas of the County. You should also visit or contact the Kent County Department of Inspections & Enforcement or the Sussex County Department of Planning to verify that your business is zoned properly. First, this will ensure that your business is in compliance with the regulation for the Zoning District in which your business is located. Secondly, it will allow you to determine whether you would be able to expand your business (in size or level of activity) in the future, or apply for a conditional use or rezoning. When you have verified that your business is zoned properly, you will need to obtain a Zoning Certificate of Use or a Certificate of Zoning. Except for the town of Ellendale, Kent and Sussex Counties jurisdiction is limited to unincorporated areas of the respective County. State governments have traditionally required special licenses for many kinds of professionals, such as physicians, dentists, lawyers, and accountants. To further protect consumers, Delaware has expanded the list of occupations that must be licensed by the state to include many other occupations. Most state licenses not only require payment of fees, but are only issued for a given profession or occupation upon showing that you have completed certain educational or experience requirements, or passed certain tests, or some combination of the foregoing. All persons conducting any business in Delaware or having one or more employees in the state are required to register with the state for a business license, on Form CRA, Combined Business Registration Application. This application form provides a combined registration for your business license, for the gross receipts tax, and as an employer withholding agent. Businesses with employees must also register with the state for unemployment tax and workers' compensation. In addition, even those business entities formed in the state that do no business in Delaware are required to register with the state for a business license. Depending on where your business is located, you may also have to obtain a city or county business license, or both, in addition to the state license. New businesses applying for a state business license will receive a welcome letter with tax tips about their respective business and the name of a personal representative at the Office of Business Taxes who will answer questions and assist in tax processing issues. All businesses operating in the state are subject to a gross receipts tax, at rates that vary by type of business, as discussed in Section IV(d). In addition, an annual flat license fee must be paid by all businesses, generally $75 for one place of business and either $25 or $75 for each additional business location in the state. For information on state licensing and business registration requirements in Delaware or to obtain a copy of the Form CRA business registration form, see the contact information for the offices of the Delaware Division of Revenue, listed in Section VI(a). Also, to find out whether the type of profession or occupation you wish to engage in requires a specific state license, contact the main state licensing agency, the Division of Professional Regulation -- Administrative Services Department, at the address listed for it in Section VI(a). UPDATE NOTE: (c) Income and Franchise Taxes. Delaware has both an individual income tax and a corporate income tax, as well as a franchise tax on domestic corporations. A $250 annual tax is also imposed on LLC's and limited partnerships, and a $200 per partner annual tax or fee is imposed on LLP's. TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS The Delaware individual income tax is imposed at a maximum tax rate of 5.95%, having been reduced significantly in the late 1990s and again in the year 2000. Individual taxpayers generally pay state income tax on their business earnings from a sole proprietorship, or on their share of the earnings of a pass-through entity, such as a partnership or S corporation, or LLC. The Delaware personal income tax return for residents is Form 200-01, which is filed with the Division of Revenue, and is due by April 30 of the following year for each calendar tax year, or by the last day of the fourth month after the end of a fiscal tax year other than the calendar year. Partnerships, or entities taxable as partnerships, such as LLC's, are not subject to state income taxation in Delaware, but must file an information return with the Division of Revenue each year, showing each partner's share of taxable income, losses, and credits, on Form 300. The partnership information return is due by April 1 of the following year, in the case of a calendar year partnership. Individual taxpayers doing business as sole proprietors (or who are partners in partnerships, members of LLC's, or shareholders in S corporations), who have taxable income from the business, will generally be required to make advance payments of estimated Delaware individual income taxes, on Form 200-E, if their net tax liability (not covered by withholding) exceeds $400. Estimated tax payments are due in four installments, on the 30th of April and on the 15th day of June and September, and on January 15th of the following year, in the case of a calendar year taxpayer. No underpayment penalties will apply if the individual taxpayer's tax payments are equal to at least 90% of the current year's total tax liability, or if the tax paid in for the current year is at least equal to 100% of the prior year's tax liability (110% in the case of certain high-income taxpayers, as under federal tax laws). UPDATE NOTE: The Delaware corporate income tax rate, on corporations other than S corporations, is a flat tax of 8.7% on the taxable income of a corporation that is apportioned to Delaware. The state corporation income tax return is Form 1100, which must be filed with the Division of Revenue by the 1st day of the fourth month following the end of the taxable year, or April 1st in the case of a corporation whose taxable year is the calendar year. Corporations are required to make estimated tax payments of their state corporate income tax in advance, on Form 1100-T. Estimated tax payments are due in advance, in four unequal installments, on the 1st day of the fourth month of the taxable year, and on the 15th day of the 6th and 9th months, and the 15th day of 1st month of the following year. For a calendar year corporation, the payment schedule is as follows:
Date of Percentage of estimated Cumulative %
installment tax due on such date due by such date
------------- ----------------------- ----------------
April 1 50% 50%
June 15 20% 70%
September 15 20% 90%
January 15 10% 100%
Penalties will be imposed for failure to make the required estimated tax payments on a timely basis. However, the current year estimated tax payments need only be equal to 80% of the current year's tax, or, if the preceding year was a full year of 12 months, 100% of the prior year's tax liability, if less. Certain large corporations, those whose Delaware taxable income was $200,000 or more in any of the three preceding tax years, are not allowed to base their estimated tax payments on the prior year's tax liability, however. Delaware recently (in 2004) created a new type of corporate entity, called a Delaware Headquarters Management Corporation, or "HMC," to attract investment management firms and headquarters support operations, in order to increase employment in the state. The new HMC entity is subject to state income tax at a rate of 8.7% on its headquarters management activities and 4% on investment income, with a minimum annual tax of $5,000. An HMC is exempted from the General Service license and the Delaware gross receipts tax. Various tax credits of up to $400 per employee and for expenses incurred in Delaware may be available to an HMC that increases its number of employees or expenditures in the state, potentially reducing the income tax by as much as 99% (but not below the $5,000 annual minimum). In addition to corporate income tax a domestic (Delaware) corporation is required to file annual reports with the Secretary of State and pay a franchise tax that can range from $75 to $165,000, depending on the amount of authorized stock of the corporation. Note that foreign corporations are not required to pay the Delaware franchise tax that applies to Delaware corporations. Instead, they pay an annual report fee of $100 per year. S corporations are generally not subject to the Delaware corporate income tax, and are treated the same as for federal income tax purposes. However, if an S corporation has any nonresident shareholders, it is required to pay Delaware income tax on their behalf on their share of the corporation's Delaware-source income at the rate of 5.95% and make quarterly payments of the estimated amount of such tax. If none of the nonresident shareholders has other sources of income from Delaware, the S corporation may instead be permitted to file a composite tax return on behalf of all the nonresidents, relieving them of the need to file nonresident Delaware individual income tax returns. CAUTION: S corporations doing business in Delaware must file income tax information returns on Form 1100S. Domestic S corporations are subject to the state franchise tax to the same extent as other domestic (Delaware) corporations. TAXATION OF LIMITED LIABILITY COMPANIES In Delaware, a limited liability company (LLC) is taxed in the same manner as a partnership, thus avoiding the possible double taxation of income that can occur with a corporation. Delaware law now permits formation of 1-person LLC's, which will generally be treated as sole proprietorships (disregarded entities) for state tax purposes. Note that it is not always entirely clear whether an LLC is a "single-member LLC" or not, where the "single owner" is a married couple who hold the entire ownership of the LLC in some form of co-tenancy, such as joint tenants with right of survivorship, tenants by the entirety, or as tenants in common. The federal Internal Revenue Service (IRS) has taken a very lenient position in Rev. Proc. 2002-69, where a couple hold the LLC interest as community property, ruling that the IRS will accept whatever choice the couple make, either to disregard the LLC as an entity (treating it as a "single-member LLC") or to treat it as a partnership between the husband and wife. However, Delaware is not a community property state, so where the LLC is owned by a husband and wife in some form of co-tenancy, it is unclear whether the IRS treatment would be as lenient as for community property owners, since the IRS has not issued any published rulings on whether an LLC can be a disregarded entity if held in one of the various forms of co-tenancy by a married couple, rather than being held as community property. Thus, it is also unclear, where an LLC is owned by a husband and wife as co-tenants, whether Delaware would treat the LLC as a single-member LLC or as a partnership. (d) Sales and Use Tax. There is no general sales or use tax in Delaware. However, all types of businesses are subject to a tax on their gross receipts, which generally range from 0.077% to 0.576% of the company's taxable gross receipts (or from 0.096% to 0.72% beginning in 2009), and for which there are very few deductions or exclusions. However, most types of businesses are allowed a monthly exclusion and thus are not taxable on the first $80,000 of gross receipts per month (or $1 million per month, in the case of manufacturers). Some industries, such as utilities, are not allowed the above monthly exclusions and pay tax at rates as high as 4.25%; similarly, hotels and motels are required to collect an 8% room rental tax from their guests, with no monthly exclusion allowed. IMPORTANT NOTE: Several years ago, an across-the-board gross receipts tax cut of 4% was enacted. Thus, the former 0.75% gross receipts tax rate on retailers was reduced to 0.72%, for example. Under 2005 legislation, the gross receipts tax has again been reduced, across the board, by 20% (25% for auto makers), beginning in 2006, so that the rate on retailers, for example, is reduced to 0.576%, beginning January 1, 2006. (Rates were not reduced for in 2006 for utility companies, cable TV operators, or for the room rentals tax, however.) In addition, the $50,000 monthly exclusion previously allowed for most types of businesses was increased to $80,000 on January 1, 2006. Obtain gross receipts tax forms and filing instructions from the Department of Finance, Division of Revenue, for which contact information is listed in Section VI(a). (e) Real and Personal Property Taxes. In Delaware, as in every other state, any business real estate you own will be subject to real property taxes. In general, there is little that you must do, unless you wish to challenge your assessed valuation, since the assessor will bill you for each year's property taxes as they come due. Delaware, unlike most other states, does not impose any property taxes on tangible personal property, such as equipment or inventories, or on intangible property. ("Personal property" is any kind of property that is not real estate.) (f) Other Business Taxes. Delaware imposes a number of excise and other taxes on businesses, including:
Delaware formerly had an inheritance tax, but it is repealed for decedents dying after December 31, 1998. (g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. Filing articles of incorporation automatically protects that corporate name in Delaware. While in most states a sole proprietorship or partnership whose name includes the surnames of the owner or all the partners is not generally considered to be a fictitious name, Delaware requires that both the surname and Christian (first) name of each owner appear in the business name, or else it is considered to be a fictitious name. If your unincorporated business operates under an assumed or fictitious name in Delaware, you must register such trade name in each county where you do business, with the Prothonotary of the county, at the office of the Superior Court for the county. The registration is filed on a standard form, and there is a small ($5.00) registration fee you must pay. Bring your checkbook and some identification, as the registration form must be notarized. Registration will also protect your trade name from being used by other businesses, in each county where it is registered. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. In addition, since Delaware imposes a state income tax on the income of individuals, you will need to also withhold Delaware income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Division of Revenue, on Combined Business Registration Application, Form CRA. Any employer that is required to deposit federal employment taxes by electronic funds transfer (EFT) will also be required to deposit Delaware withholding taxes by EFT, as well. For more information on Delaware income tax withholding and registration requirements for employers, see the contact information for the offices of the Division of Revenue, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 weeks during any calendar year or if your payroll amounts to $1,500 in any calendar quarter, you, as an employer will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Delaware unemployment tax are required to register with the Division of Unemployment Insurance of the Delaware Department of Labor. All employers are required to file Form UC-1, Report to Determine Liability and If Liable Application for Employer Account Number. Employers are required to pay Delaware unemployment tax on the first $10,500 of wages paid to each employee in 2009. Most new firms are subject to a standard "new employer rate," but construction industry employers are subject to higher tax rates. You will be notified of your initial tax rate when you register as an employer. For 2009, the new employer tax rate for most employers is 2.5% of the taxable wage base and rates start at 4.7% for construction industry employers. After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Delaware law, cannot be charged to your employees or withheld from their wages. You must prominently display the official poster, Notice of Coverage, Form UC-6, in your workplace. For more information on your Delaware unemployment tax obligations as an employer, see the contact information for the offices of the Delaware Department of Labor, Division of Unemployment Insurance, listed in Section VI(a). (c) Workers' Compensation. In Delaware, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee. Similarly, up to eight officer-employees of a corporation who are stockholders of the corporation may be exempted from coverage if such officers enter into a written agreement with the corporation to be excluded from coverage. Similarly, up to 4 members of an LLC may elect to be excluded from coverage. UPDATE NOTE: Workers' compensation provides wage loss and medical benefits to employees injured on the job and it also protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. CAUTION: In addition to obtaining workers' compensation coverage for employees, employers are required to obtain a summary of the workers' compensation law from the Division of Industrial Affairs, Office of Workers' Compensation, and post it prominently in the workplace. For more detailed information regarding your obligations as an employer under the Delaware workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Division of Industrial Affairs, Delaware Department of Labor, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still usually be subject to the Delaware wage-hour laws, which provide for a state minimum hourly wage of $6.15 since October 1, 2000, and which increased to $6.65 an hour in 2007 and $7.15 in 2008 and 2009. The Delaware minimum wage will automatically be increased to equal the federal minimum wage, when the federal minimum wage is increased above the current state minimum wage (to $7.25 an hour on July 24, 2009). Similar to the federal minimum wage law, Delaware's minimum wage requirements do not apply to any individual employed in a bona fide executive, administrative or professional capacity, or as an outside commission paid salesperson, not a route driver, who customarily performs services away from the individual's employer's premises taking orders for goods or services. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Division of Industrial Affairs, Delaware Department of Labor. In addition to wage-hour laws, most businesses are subject to federal and state child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must be cognizant of the state child labor laws, if hiring minors under 18 in Delaware. Under these laws, you generally may not hire children under age 14, with only a few limited exceptions, such as working in non-hazardous occupations in a business owned by a parent, or for newspaper delivery to consumers or working as a golf caddy. Children between ages 14 and 18 can be hired, but only if work certificates for them are on file. Minors who are 16 or 17 years old:
Minors who are 14 or 15 years old may not work:
Children under the age of 16 may work as models, performers, or entertainers, but only if the Delaware Department of Labor issues a special permit allowing the child to engage in such work. (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Delaware is one of the states that does not have its own local equivalent of OSHA. Note that while you may obtain a free safety consultation from federal OSHA experts, they must and will cite you for any violations they discover at your workplace. This is not the case in states with their own OSHA programs, where, if you request a safety consultation from the state agency and they detect violations, they will not cite you if you promptly correct the unsafe conditions. The Delaware Department of Labor, Division of Industrial Affairs, can provide you with such free safety consultations, as well as information on complying with the federal OSHA requirements. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Wilmington offices of the Division of Industrial Affairs, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Delaware labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. Final wage payments to an employee who quits or is discharged by you between paydays may be made on the next regular payday in the regular manner, or must be mailed to the employee if so requested. Failure to make timely payment results in liquidated damages of 10% of the amount unpaid for each day payment is delinquent, except Sundays and legal holidays. An employer must allow an employee an unpaid meal break of at least 30 consecutive minutes, if the employee works 7 1/2 or more consecutive hours. The meal break must be given some time after the first 2 hours of work and before the last 2 hours. However, there are a number of exceptions to this requirement, such as where only one employee may perform the duties of a certain position or where the employer has fewer than 5 employees on a shift at a single place of business. In addition, employers of four or more employees are required to:
For required posters and more information on Delaware labor law requirements, contact the Delaware Department of Labor at the address listed in Section VI(a). (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. State labor laws in Delaware generally favor labor unions, in that Delaware does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. In addition, the state's "anti-scab" law also makes it unlawful for any person, not directly involved in a labor strike or lockout, to secure or recruit strike breakers to replace of striking employees or employees who have been locked out in a labor dispute. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Delaware. Delaware law prohibits employment discrimination on the basis of race, marital status, genetic information, color, religion, age, sex or national origin. IMPORTANT NOTE: Covered employers are required to obtain and display in the workplace an anti-discrimination poster, which you can obtain from the Division of Industrial Affairs, Delaware Department of Labor. You can obtain information on the Delaware civil rights laws and regulations from the Discrimination Program section of the Division of Industrial Affairs, at the address listed in Section VI(a). (4) Reporting new hires. Under federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a designated state agency (the Division of Child Support Enforcement for Delaware employers) within 20 days after the date of hire. If you file reports electronically or by magnetic media, you must report by two monthly transmissions (if necessary) not less than 12 nor more than 16 days apart. See the contact information for the Delaware Division of Child Support Enforcement, listed in Section VI(a), for information on where and how to file new hire reports. (5) Lie Detector Tests Prohibited. Delaware law generally prohibits employers from requiring any employee or job applicant to submit to a polygraph test or voice stress analysis test (lie detector tests) as a condition for obtaining employment or continuing in employment. Unlike the lie detector test prohibitions under federal law or under most other states' laws, the Delaware law makes no exceptions for any types of businesses. Similarly, an employer may not monitor or intercept any telephone call, e-mail, or Internet access or usage of an employee without first notifying the employee that such communications will be monitored. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Delaware, as many states have done in recent years, has set up what can be considered a "one-stop" center, the Delaware Small Business Development Center at the University of Delaware, to help your new or existing business with questions about all necessary state licenses and permits. Contact this helpful organization at the address listed under Small Business Development Centers, in Section VI(b). BUSINESS STARTUP INFORMATION. Another helpful agency that will assist you in getting your business financed and off the ground is the Delaware Economic Development Office. This office can also provide you a useful free publication, the Delaware Small Business Start-up Guide (updated through 1998). Contact this agency at the address listed in Section VI(d). In addition, you can register your business with the state for Delaware income tax, gross receipts tax, employer withholding, and your state business license on a single state application form, Form CRA, Combined Business Registration Application, which you should obtain from and file with the Division of Revenue. Delaware has recently established a "one-stop" website, the One Stop Business and Licensing Registration System, where you can register your business with the Delaware Division of Revenue, the Division of Unemployment Insurance, and the Office of Workers' Compensation, with links to the Delaware Division of Corporations to access incorporation, partnership, or LLC forms, and to reserve a legal entity or name. See Section VI(c) for links to the One Stop site and other Delaware state government web sites. Addresses and other contact information for the Division of Revenue and other key state government agencies mentioned in this book are listed below for your convenience. SECRETARY OF STATE. Contact the Division of Corporations of this office for information on:
Division of Corporations TAXES. Obtain state income tax, gross receipts tax, and other miscellaneous business tax forms, instructions and information from the following agency, which is the main tax collection agency in Delaware. You can register for the above taxes and also register for your state business license and as an employer, for state income tax withholding purposes, all on a single form, Form CRA, Combined Business Registration Application, which should be filed with the Delaware Division of Revenue. Contact the Division of Revenue at: Division of Revenue STATE LABOR LAWS. Contact the Delaware Department of Labor about occupational safety and health statistics, unemployment insurance (tax), and various other state labor laws, including:
Delaware Department of Labor STATE LICENSES. The Division of Professional Regulation of the Department of State is the main Delaware licensing agency to contact about professional and occupational licenses. However, all businesses must also register on Form CRA for a general business license with the Division of Revenue, at the address listed above for that agency. For information on specific occupational or professional licensing requirements in Delaware, contact: Division of Professional Regulation EMPLOYER WITHHOLDING. Contact the Division of Revenue, the main state tax agency, at the address for it listed above, to register as an employer for purposes of Delaware income tax withholding. STATE UNEMPLOYMENT TAX. Contact the Delaware Department of Labor, Division of Unemployment Insurance at the address listed above for the Department of Labor, to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. NEW HIRE REPORTING. All new hires must be reported to the Division of Child Support Enforcement (DCSE) within 20 days of hire (or sooner, if filing electronically or magnetically). A copy of the employee's W-4 form is acceptable. The W-4 form must include the employee's name, address, social security number; the employer's name address and Federal Identification Number (EIN). Online filing is available, or this information can be mailed to: Division of Child Support Enforcement WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the Division of Industrial Affairs, Department of Labor, at the address listed above for that agency. STATE OSHA PROGRAM. There is no state OSHA enforcement program in Delaware. The federal government provides federal OSHA enforcement instead. For required posters and information on federal occupational safety and health laws that affect you as an employer, or to inquire about free safety consultations in Delaware, contact the offices of the Division of Industrial Affairs of the Delaware Department of Labor, at the address listed above for that agency. (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Delaware to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you. Also request the publication, the Small Business Start-up Guide. Small Business Development Center(c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major Delaware state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Delaware. Since new sites are appearing frequently, you might also want to search for other Delaware government Web sites by using one of the popular Internet search engines, such as Yahoo, MSN.com, or Google. To start your Internet search for Delaware government information, you may want to begin with the following Internet sites: State of Delaware Home Page: Delaware list of state agencies: Delaware One Stop Business and Licensing Registration System: Delaware Department of Finance, Revenue Division (state taxes): Delaware Division of Corporations (Secretary of State's office): Small Business Development Center, University of Delaware: Delaware Economic Development Office (DEDO):(d) Financing Sources. For information and help on locating financing for your small business, contact the U.S. Small Business Administration office in Wilmington, or contact the Business Finance Section of the Delaware Economic Development Office, at the address listed for that agency below. The Delaware Economic Development Office (DEDO), through its financing subsidiaries, The Delaware Economic Development Authority and the Delaware Development Corporation, offers comprehensive assistance in loan "packaging" by utilizing existing State and federal programs. The Authority is skilled in generating financial options for the State's business community in conjunction with private financial institutions. By customizing loan packages for individual firms, DEDO's professional staff is able to match development needs with available financial resources. Contact DEDO at: Delaware Economic Development Office The address of the SBA Branch Office in Delaware is: U.S. Small Business Administration |
Copyright © 2009 Michael D. Jenkins
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