Delaware remains one of the most popular states in the USA for non-resident company registration in 2024. All of this is due to a business-friendly environment, flexible corporate legislation, and an optimized taxation system.
However, is everything as smooth as it seems at first glance? Despite its apparent advantages, such as ease of business and tax benefits, registering a company in Delaware for non-residents involves specific nuances. For example, despite the absence of some local taxes, companies must comply with federal tax requirements in the USA.
Let’s delve into these nuances and determine how suitable Delaware company registration is for your business.
Type of legal entity
Delaware offers several legal types, the most popular of which are the corporation (S-corp or C-corp) and the Delaware LLC. They have unique features, from flexibility in managing internal structures to conducting business without minimum required capital. Ownership of the company in the form of shares or membership interests is also significant. You can read more about the differences between these types in our article via the link.
Taxation System
The taxation system in Delaware is a mix of federal, state, and specific local taxes.
At the federal level, all corporations in the USA are subject to a 21% corporate income tax. This standard rate applies to all corporations, regardless of the registration state.
In Delaware, there is a state corporate income tax rate of 8.7%. However, if a company has an official corporate office in Delaware but does not conduct business directly in the state, it is exempt from this tax.
Delaware has a franchise tax calculated based on the number of shares. For example, for companies with up to 5,000 shares, the franchise tax rate is $175 per year; for those with 5,001 to 10,000 shares, it is $250. For every additional 10,000 shares or part thereof, the amount increases by $85. All LLCs, Limited Partnerships, and General Partnerships formed or registered in Delaware must pay an annual franchise tax of $300 due June 1. This is a flat fee that is not calculated based on company revenue.
There is no Value Added Tax (VAT) in the USA. However, when providing services to clients in the European Union, an American company must pay VAT according to EU directives and local legislation.
Reporting
Despite a favorable business environment, registering a company in Delaware also requires compliance with annual reporting requirements and rules to maintain a good standing in the state.
All companies in the USA must register for tax purposes
Every Delaware company is required to submit financial reports annually. Penalties are imposed for missing deadlines or not providing reports. Delaware introduced an electronic system for submitting annual reports for convenience and transparency
Return 1120 US Corporation Income Tax is a tax return that US companies use to report their gross receipts, expenses, credits, and deductions to the IRS (Internal Revenue Service). This document helps companies determine how much corporate income tax they should pay
There are no audit requirements in Delaware. This removes additional burdens and makes doing business more accessible with fewer expenses
Pros and Cons of registering a company in Delaware
Pros
Сompany registration process in Delaware is simple and economically advantageous, attracting businesses worldwide
Access to US financial institutions is crucial for companies seeking to expand their presence in the North American market
The absence of mandatory audited reporting significantly simplifies accounting procedures for companies
Investor rights protection is backed by years of judicial practice
Companies can maintain the anonymity of their directors and officers
In Delaware, one person is allowed to hold positions of officer, director, and shareholder simultaneously, which is ideal for small enterprises
Cons
Despite tax benefits at the state level, federal taxes remain high
Even if a company is registered in Delaware, it may be subject to taxation in the state, where the company operates
Additional expenses and requirements include franchise tax.
The Corporate Transparency Act has been enacted, requiring reporting on company beneficiaries and applicants
Delaware offers a range of attractive business opportunities, mainly thanks to its simplicity of registration, tax benefits, and investor protection. However, companies must be prepared for particular bureaucratic and financial challenges in the context of federal taxation and recent legislative changes such as the Corporate Transparency Act.