Delaware C Corp for a Startup: Setup Steps, Cost and Tax Traps

Delaware C corp formation: what are the steps, in order?

A Delaware C corp is a corporation formed under Delaware law that pays federal income tax on its own profit at 21% and files Form 1120 every year, even with no income (IRS Form 1120 instructions). Delaware charges from $109 to file, then by every March 1 a $50 report fee plus franchise tax, which can stay at the $400 minimum for a full year with the share setup below. Setting one up takes seven steps. Their order matters most for tax: founders buy their stock before any outside money arrives, and the 83(b) clock starts on the day they buy it.

1. File the certificate of incorporation with the Delaware Division of Corporations. It names the corporation and its registered agent and states the number of authorized shares and their par value (Delaware Code, title 8, § 102). Delaware requires a registered agent with a physical street address in Delaware (Division of Corporations).
2. Adopt bylaws and elect directors and officers, at an organization meeting or by written consent instead of a meeting (§§ 107–108).
3. Issue founder stock by a board resolution that sets the number of shares, the price and the form of payment (§ 152). Each founder signs a stock purchase agreement, assigns any IP to the corporation and pays the price, by check if the bank account is not open yet.
4. Each founder whose shares vest decides on an 83(b) election, filed with the IRS within 30 days of the purchase.
5. Get the EIN from the IRS once Delaware has filed the certificate.
6. Open the bank account in the corporation's name and deposit the founders' payments for their shares.
7. Register in your home state as a foreign corporation if the company does business there, and put Delaware's March 1 report and the first Form 1120 on the calendar.

A corporation formed in the US does not file a beneficial ownership report under FinCEN's current rule; see who still files a BOI report.

The setup stops being routine when a founder lives outside the US, a SAFE or investor check arrives before founder stock is issued, the business already runs as an LLC or partnership, a founder brings code or designs built before incorporation, or the team has worked from a state for months without registering. Each one changes the tax at issuance or adds filings and penalties that grow with time.

Gather before filing: the cap table plan (founders, share counts, vesting), each founder's legal name, address and SSN or ITIN, the state where each founder works, a list of IP to assign, and the bank you plan to use.

How many shares should a Delaware C corp authorize, and at what par value?

With par value stock and a very small par value, a large number of authorized shares can still leave the March 1 franchise tax at the minimum while gross assets are small, as long as each annual report lists the issued shares and gross assets. Par value is the lowest price a share may be issued for, not what it is worth. No-par stock or a high par value can turn the same share count into a large yearly bill.

Delaware computes the tax two ways and charges the lower (Delaware Code, title 8, § 503): by authorized shares alone, which grows with every 10,000 shares the certificate allows, or by assumed par value capital, which uses gross assets and issued shares and is open only if the annual report gives both (Delaware franchise tax calculation). Two formation choices take that relief away. With no-par stock, Delaware says the authorized shares method always gives the lower tax, so a large count of no-par shares means a large bill every year. A high par value sets a high floor under the second method.

Authorizing more shares than the founders buy leaves room for an option pool and investors without amending the certificate. The state fee to file the certificate starts at $109 and rises with the stock authorized and the page count (Delaware fee schedule). The math, and how to recalculate a bill already received, is in Delaware franchise tax.

How do founders buy their shares, and what should they pay?

Founders buy their shares at formation, when the corporation owns almost nothing, so a low price can match what the shares are worth. Delaware requires only that par value shares be issued for at least their par value (§ 153). The tax risk is a price below value: when a founder gets shares in connection with work for the company, any value above the price paid is taxed as pay (26 U.S.C. 83).

A founder can pay in two ways, and the board resolution should say which:

• Cash: the founder pays the price to the corporation, and the payment goes into its bank account. Keep the bank record with the stock purchase agreement.
• IP or other property: a founder can assign code, designs or other property for shares. No gain is recognized when property is transferred to a corporation solely for its stock and the transferors control at least 80% of it right after (26 U.S.C. 351). Stock issued for services is not treated as issued for property, so its value is pay, and a founder who gets shares only for work does not count toward the 80%; a token property payment made mainly to qualify does not change that (26 CFR 1.351-1).

The trap is issuing founder stock after a SAFE, a priced round or real traction, when the shares may be worth far more than founders pay. That case is in founder shares issued after a SAFE. The journal entries for the purchase are in setting up books for a new corporation.

Why does the 83(b) clock start at the stock purchase, not at incorporation?

The 30-day window runs from the date the shares are transferred to the founder, which is the purchase date, not the date Delaware filed the certificate (26 U.S.C. 83(b)(2); Form 15620 instructions). Each founder mails it to the IRS office where they file their own return, on Form 15620 or a signed statement that meets the regulation. Shares bought three weeks after incorporation have a deadline about seven weeks after incorporation. A founder who buys shares that vest and files no election is taxed at each vesting date on their value then, less what was paid. Who files, how to mail it, and what to do after a missed window are in founder shares that vest.

When do you get the EIN, and who is the responsible party?

Apply after Delaware files the certificate: the IRS says to form a corporation with the state first, or the application may be delayed (IRS: Get an EIN). The online application is free and, if approved, issues the number at once when the principal place of business is in the US and the responsible party has an SSN or ITIN.

• Responsible party: the individual who ultimately owns or controls the corporation and directs its funds and assets. It must be a person, not an entity (Form SS-4 instructions). In a founder-run startup, it is a founder who meets that test; the application names one.
• Closing month: line 12 asks for the last month of the tax year. With December, the first Form 1120 covers incorporation through December 31.
• Changes: a new responsible party is reported on Form 8822-B within 60 days.

A founder without an SSN or ITIN uses another route; see EIN without an SSN.

Does a Delaware C corp need to register in the state where you work?

Yes, if the company does business there. A Delaware corporation that does business in another state generally registers there as a foreign corporation and becomes subject to that state's corporate tax, where it has one. California treats a corporation as doing business there if it is commercially domiciled in California or engages in any transaction for financial gain in the state, so founders running the company from California generally bring it in (FTB: Doing business in California).

What registering in California involves, as the example state:

The first-year relief has a catch. A corporation that qualified through the Secretary of State owes no minimum tax in its first taxable year, but the FTB says this does not apply to corporations that are not qualified (Form 100 booklet). A corporation that does business in California without registering still owes the franchise tax (FTB: Corporations).

Other states set their own fees and minimum taxes. How to register anywhere is in registering in another state; the yearly returns for California, New York, Texas and Massachusetts are in Delaware C corporation taxes for startups.

Which formation choices protect the QSBS exclusion later?

The qualified small business stock exclusion can remove much of a founder's gain on a later sale, but several of its tests are fixed when the stock is issued (26 U.S.C. 1202). Meeting them at formation does not guarantee the exclusion; the holding period and the business over the years also count.

• A domestic C corporation: only stock in a US C corporation qualifies, and it must stay a C corporation for substantially all of the founder's holding period.
• Original issue: the founder gets the stock from the corporation itself, for money, other property (not stock) or services. Shares bought from another holder do not qualify.
• Gross assets: the corporation's gross assets must not have exceeded $75,000,000 at any time before the issuance or immediately after it. Property contributed for stock, such as IP, counts at its fair market value when contributed. For the founder who contributed it, gain built up in the IP before that day is not excluded, and the holding period starts on the exchange date (26 U.S.C. 1202(i)).
• The business: fields such as health, law, consulting, financial services, and any business whose main asset is the skill or reputation of its employees are excluded; check the planned business against section 1202(e)(3).

Keep each issuance's date, price and the balance sheet at that date. What the exclusion is worth and how long to hold is in QSBS for founders and early employees; when the clock starts is in when to incorporate a startup.

Delaware C corp cost: what do setup and year one cost?

Delaware's filing fee starts at $109; each year after brings a $50 report fee plus franchise tax, and the home state and a registered agent add their own. Everything below is due whether or not the company has revenue.

Delaware prorates the first year's franchise tax for the part of the year the corporation existed (§ 503(d)). Missing March 1 adds a $200 penalty plus 1.5% interest a month on tax and penalty (Division of Corporations).

State formation fees and the legal costs of organizing the corporation, such as drafting the certificate and bylaws, are organizational expenditures, deducted and spread under their own rules (26 U.S.C. 248); costs of issuing or selling stock are not (26 CFR 1.248-1). How much comes off the first return is in startup costs before launch; what else goes on a first return with no revenue is in the first corporate return for a pre-revenue startup; the full yearly calendar is in Delaware C corporation taxes for startups.

Which formation records will the first Form 1120 and investors ask for?

Keep one folder from day one. The first Form 1120 draws on it, and so does any diligence review, which asks whether each share was approved and paid for, whether 83(b) elections were filed on time, whether the company owns its IP, and whether it is in good standing.

• Certificate of incorporation as filed, and any amendments
• Bylaws and the organization consent
• Board resolutions issuing stock, with stock purchase agreements and IP assignments
• Proof of each founder's payment
• Each founder's 83(b) election and proof of the date it was filed
• The EIN confirmation letter
• A stock ledger showing every issuance, its date, price and holder, which also answers Form 1120's ownership questions
• Home-state registration and tax account numbers
• Receipts for formation costs
• Each year-end balance sheet: Delaware's assumed par value method needs gross assets, and Form 1120 asks for Schedule L unless receipts and total assets are both under $250,000 (IRS Form 1120 instructions)

Example

These examples are illustrative; figures are in US dollars.

Two founders in Austin, 10,000,000 shares at a tiny par

The certificate authorizes 10,000,000 shares at $0.00001 par. The two founders buy 8,000,000 shares for $80 in total and, because the shares vest, each files an 83(b) within 30 days of the purchase. With the shares worth what the founders paid, each election reports no income.

By year end, after founder loans to start building, its total assets on Form 1120 Schedule L are $50,000; Delaware uses that figure for its first March 1 report.

• Authorized shares method: $250 for the first 10,000 shares plus $85 for each of the 999 further blocks of 10,000, or $85,165.
• Assumed par value method: $50,000 ÷ 8,000,000 issued shares = $0.00625 a share, above par. Times 10,000,000 authorized shares, that is $62,500 of assumed capital, or $25 of tax at $400 per million, raised to the $400 minimum for a full year.

By reporting issued shares and gross assets, the corporation pays the $400 minimum (prorated for a short first year) plus the $50 report fee. The founders also register the corporation in Texas, where they work.

A San Francisco founder who forms in March

• Year one (March to December): Delaware filing fee from $109, a registered agent's fee, a $50 Delaware good standing certificate and $100 to register in California, then a $25 Statement of Information within 90 days: at least $284 in government fees, plus the agent. Having qualified, the corporation owes no California minimum tax this year; with a loss, it owes no California tax but files Form 100.
• Following spring (year two): Delaware's report and prorated franchise tax by March 1; by April 15, the first Form 1120 and Form 100 for March to December, with no tax because of the loss, and the $800 California minimum tax for year two, paid as that year's first estimated payment, not with next year's return.
• Each year after: the March 1 Delaware report, then by April 15 the prior year's Form 1120 and Form 100 and the new year's $800. State fees now run about $1,275 a year ($800 California tax, $25 Statement of Information, Delaware's $400 minimum tax and $50 report fee), plus the agent and any tax on profit.

Founder shares issued after a $500,000 SAFE

Two founders sign a $500,000 SAFE before issuing their own stock. The corporation now holds $500,000 of cash, so its common stock is worth more than $0.00001 a share. If the common were valued at $0.02 a share, a founder buying 4,000,000 shares for $40 would have about $80,000 of income taxed as pay. An 83(b) election fixes that amount at purchase; it does not remove it. Issued before the SAFE, the same shares could have been priced at a much lower formation value.

Different for you?

• A founder lives outside the US: the EIN, the stock purchase and the year-one filings change; see a Delaware C corporation for a non-resident founder and get business formation help before shares are issued.
• You are Canadian founders raising from US investors: compare a Delaware or Canadian corporation for a startup.
• The business already runs as an LLC or a corporation in another state: see moving a startup into a Delaware corporation and get business formation help before new shares issue.
• A SAFE or investor check came before founder stock: see founder shares issued after a SAFE and get business formation help.
• A founder is assigning code or designs built before incorporating: the section 351 and QSBS tests apply to that transfer; get business formation help before shares are issued for it.
• You have worked from a state for months without registering: see registering in another state and get business formation help before a state notice arrives.
• You are still deciding whether to incorporate now: see when to incorporate a startup.
• You are weighing Delaware against your home state or Wyoming: see which state to form in.
• You are incorporating a small business at home, not raising venture money: see how to incorporate a business.
• A March 1 bill already looks too high: see Delaware franchise tax.