How to Establish a Delaware Professional Corporation

Identify the Appropriate Structure

‍While all businesses should contemplate a formal entity structure, some find that a corporation is more fitting than other options. When creating a business in Delaware, professionals generally choose between a professional service corporation (PSC) or a limited liability company (LLC).

A professional corporation operates under the oversight of a board of directors, tasked with drafting, amending, and implementing the company’s bylaws. Professional corporations also have the ability to issue stock. Conversely, LLCs adopt a more informal structure, potentially managed by their members.

Taxation varies as well. In a professional corporation, corporate profits are subject to taxation, while shareholders must pay taxes on both their personal income and dividends, resulting in double taxation. S corporation status can mitigate this burden provided certain criteria are met. On the other hand, LLCs can select from various filing options.

For further insights, refer to our guide on how to form an LLC in Delaware. If you opt for a professional corporation, make the following decisions prior to filing.

Determining Ownership Allocation

‍Decide upon the distribution of ownership among shareholders, taking into account each party's vested interest in the organization.

Defining Corporate Governance

‍This is a pivotal aspect when crafting your bylaws. PSCs operate under the governance of an elected board of directors, responsible for appointing officers, making business decisions, and maintaining corporate records.

Step-by-Step Process:

Step 1: Choose a Business Name

‍Select a name that effectively conveys your business's nature and services. Observe the following guidelines:

• Ensure your chosen name isn't already in use by another Delaware entity. Utilize the Delaware Division of Corporations' business name search engine to verify availability.
• Consider reserving your preferred name, though be mindful that this incurs a fee and is valid for 120 days, with the option for renewal.
• Avoid misleading names. For example, don't use terms like "law firm" unless your business offers legal services. Similarly, refrain from financial terms such as "bank," "brokerage," or "investment."
• Include a description of your business's nature or the last name of at least one primary shareholder.
• Incorporate "Chartered," "Professional association," or "P.A." into the name.

Step 2: Appoint a Delaware Registered Agent

‍Every professional corporation must designate a registered agent with a physical address within Delaware. This agent accepts legal notices and official documents on your business's behalf. Alternatively, Stellar can assist in this process.

Step 3: Complete the Delaware Certificate of Incorporation

‍The Certificate of Incorporation formally establishes your professional corporation as a legal entity. Note that both your business and registered agent must have physical addresses within Delaware to proceed.

Step 4: Maintain a Corporate Record in Delaware

‍Keep a comprehensive record of significant business decisions, ideally with a backup copy stored off-site.

Step 5: Appoint a Board of Directors

‍Your board of directors plays a critical role in guiding your business's growth and addressing issues. Ensure that the document outlining your board's composition becomes part of your corporate record.

Step 6: Develop Corporate Bylaws

‍Your corporation's bylaws define its functioning, including:

• Procedures for shareholder voting.
• Designation of corporate officer roles by the board.
• Board size and procedures for removal or replacement.
• Dispute resolution processes.
• Meeting frequency.Consider legal review to ensure compliance with state laws.

Step 7: Conduct the Inaugural Board Meeting

‍Typically organized by the incorporator, this meeting involves:

• Reviewing and approving bylaws.
• Designating necessary officers, such as a general manager.
• Selecting a bank.
• Approving stock certificate issuance.Ensure proper minute-taking and storage of signed minutes in your corporate record.

Step 8: Address Delaware Tax Obligations

‍To file corporate tax returns, secure an Employer Identification Number (EIN) from the IRS, akin to a Social Security number for your business. Stellar offers an EIN service to simplify this process.

Additionally, aside from federal taxes, Delaware taxes must be paid. This encompasses an annual report filing fee and a franchise tax ranging from $175 to $200,000. Check with your local municipality, as some levy taxes on local businesses.

Step 9: Acquire Business Licenses and Permits

‍Professionals should obtain the requisite professional licenses before forming a Delaware professional corporation, following Title 24 of the Delaware State Code for specific regulations. Familiarize yourself with the relevant section applicable to your field and ensure compliance for both you and your employees.

You may also require other licenses and permits at federal, state, local, or industry-specific levels. Our business license report provides a comprehensive overview of your specific needs.

Step 10: Obtain Insurance for Your Delaware PSC

‍While optional, securing general liability insurance is advisable to cover potential incidents like slip-and-fall accidents on your premises. If you employ personnel, consider obtaining workers' compensation insurance, which is mandatory for one or more workers. While Delaware doesn't mandate malpractice insurance for professionals, it is a prudent measure to safeguard against liability claims related to your professional services.

Step 11: Open a Business Bank Account

‍The final step involves opening a dedicated business bank account. Safeguard your personal assets by avoiding the mingling of company and personal funds. Define authorized access and the procedures for changes, should the need arise. Ensure you have your EIN and Certificate of Incorporation readily available during the application process.

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Ready to Launch Your Business?

At Stellar, we are committed to assisting small businesses with various tools and services. Whether you require a registered agent service, wish to reserve a business name, or seek domain registration for your business website, our aim is to support your journey to success. Explore our services and reach out to us today to facilitate the growth of your enterprise.

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Disclaimer: The content on this page is for informational purposes only and does not constitute legal, tax, or accounting advice. Seek the counsel of a licensed professional for specific questions related to these topics.