Delaware has a reputation as a tax haven for corporations as it doesn’t charge income tax on corporations not operating within its confines. The state’s unique tax status is the reason over 66% of Fortune 500 companies are incorporated in Delaware.
While Delaware’s tax benefits may not wholly apply to you as a small business entrepreneur, it is nevertheless is very convenient to form a business in the state compared with others. Delaware has other advantages for those starting a business, as well: it is one of four states with no sales tax, and ranks 6th in property taxes, according to the Tax Foundation.
Convinced that starting a business in the First State is a wise endeavor? Follow our handy guide that will walk you through each step of the process, while providing you with the resources you’ll need to advance your business.
Delaware small business statistics at-a-glance
- Delaware is sales tax-free while ranking 6th in both property tax and unemployment insurance tax among the 50 states.
- 79,417 small businesses operate in Delaware, accounting for 98.3% of the state’s total businesses.
- 180,179 Delaware residents are employed by small businesses, which is 45.3% of the state’s workforce.
- Small businesses with fewer than 100 employees account for the largest share of small business employment in the state.
- In 2015, Delaware small businesses created 5,927 new jobs in the state, while businesses with 20 employees or fewer were responsible for the largest share of new jobs, adding 3,701.
- The largest small business employer in Delaware is the health care and social assistance industry, followed by the accommodation and food services and retail trade industries.
Starting a business in Delaware in 12 steps
1. Develop an idea
Every successful business starts with a good idea. Ask yourself these questions:
- Which product or service can your business provide that doesn’t already exist on the market?
- How does your business idea refine an existing product or service?
Determine your personal strengths and interests: developing an idea that suits your personality and positive traits will provide motivation to put in the long hours necessary in addressing the myriad challenges you’ll face in getting your business off the ground.
Figure out how to market your expertise: if your business idea is not something you totally believe in and can sell effectively, it will be much harder to succeed.
2. Do the research
Once you have an idea, it’s time to put it through the wringer and decide if it’s viable in the market. Conduct market research to arrive at answers to these key questions:
- Is there a demand for your product/service in Delaware?
- Who is your target market?
- Do existing businesses in Delaware offer a similar product/service?
- What makes your business unique compared to the competition?
Coming up with satisfactory answers may require refinement, or even a total overhaul, of your original idea. Be patient: you’ll only want to proceed with the next steps after determining that a niche exists in the Delaware market for your business idea.
3. Draft a business plan
Now it’s time to write the blueprint of your business. A great business plan should chart the path of your company from infancy to success while being able to attract investors to provide financing.
Your business plan ought to include the following sections:
- Executive summary – An overview of your business and why it will be successful
- Description of business – Explain the advantages of your business and the problems it solves
- Market research – Provide research on your industry, target market, and potential competitors
- Organization and staff – Detail the nuts and bolts of your business; how it’s structured and who will run it
- Product or service description – State what you are selling or offering
- Marketing plan – Explain your strategy for attracting customers
- Fundraising – The money you’ll need in the next five years to grow your business and how you’ll spend it
- Financial forecast – Data and balance sheets providing a financial forecast for your business
- Appendix – An optional section with supporting and/or requested documents like resumes, letters of reference, permits, etc.
4. Secure funding
Every business needs money to get off the ground. In fact 82% of businesses that fail do so because of a lack of cash flow, U.S. Bank found in a recent study. Your business plan should include a detailed estimate of the funds you’ll need to cover expenses for at least a year, so now it’s time to acquire the money.
If you aren’t wealthy enough to self-fund your business, you can choose from a number of other funding options. These include a loan from the U.S. Small Business Administration, taking out a loan from a commercial bank, launching an equity crowdfunding campaign, or securing funding from an angel investor or venture capitalist group active in Delaware.
An angel investor is a wealthy individual who invests their personal finances in a startup, typically in the beginning stages, whereas a VC is a group of investors that will fund a business throughout its existence.
Which route you choose depends on the specifics of your business: angel investors typically invest smaller sums to help get a startup off the ground, while VCs invest larger sums of money in exchange for a greater say in the operations of a business. Smaller startups usually opt to pursue funding from angel investors.
With the recent passing of a new angel investor tax credit bill in Delaware creating a 25% refundable tax credit for investments over $10K, the state has become one of the most angel-friendly in the nation. There’s never been a better time to seek angel funding in Delaware for a new business.
Delaware Angel Investors and VCs
- Delaware Crossing – A network of investors founded in 2005 that provides capital and counseling services to early-stage businesses in Delaware.
- Inflection Point Ventures – A Newark, DE based venture capital firm focused on providing support for early-stage information technology, telecommunications, and electronic commerce businesses.
- Leading Edge Ventures – A firm providing seed and early-stage investment in information technology and medical device companies in the Mid-Atlantic region. Initial investments range from $50K to $250K, and can eventually add up to $750K.
Additional Investor Resources
- AngelList: Delaware Angel Investors – A directory of over 4900 investors interested in funding Delaware-based startups. Listings include professional background, total investments, and areas of interest.
- First State Innovation – A network tasked with connecting angel investors with entrepreneurs in need of funding. 85% of FSI’s investors are based in Delaware.
5. Decide on a legal business entity
The form of business entity you choose will affect many factors going forward. There are 3 main options to decide from:
- Sole proprietorship – The name for running a business by yourself. Legally, you and your business are one and the same, with no separate legal entity for your business. A partnership is legally identical to a sole proprietorship, except that it comprises two or more people.
- Corporation – A complex legal structure that is a separate entity (providing legal protection to owners) from the owner and comprises directors, officers, and shareholders.
- LLC – AKA “Limited Liability Company”, this is a hybrid entity between a sole proprietorship and a corporation that possesses advantages of both. An LLCs provides the liability protection of a corporation, yet isn’t subject to double taxation as the profits go through your personal tax return.
Nowadays, LLCs are the option of choice for small business owners as they are easy to manage and provide the benefits of a corporation while lacking their complex structure. Taxwise, they operate more like a sole proprietorship.
You may want to consult with an attorney to help decide which entity works best for your business.
6. Register your business
Once you decide on the business entity right for your company, it’s time to make it official by registering with the state of Connecticut. First, use the business name search to see if your chosen business name is available in the state. After determining it is available, you can reserve your entity name online for 120 days for a fee of $75 while you complete the next steps in the process.
For sole proprietorships
This is where the paths break off depending on your chosen business entity. Sole proprietorships do not have to formally register with the state. Instead, you should file your business name with the local county clerk’s office if you are using a name other than your own.
For LLCs and corporations
Forming an LLC or corporation requires you to file incorporation documents with the Delaware Division of Corporations. Unlike many other states which allow you to file online, Delaware requires you to mail or fax your incorporation documents. You can find the applications for forming an LLC, a corporation, and a variety of other entities at the Division of Corporations website.
Appointing a registered agent to represent your company is required to form a business entity in Delaware. A registered agent receives process notices and other government paperwork on a business’s behalf. You can be your own registered agent, as long as you have a physical address in Delaware. However, if it’s your first time forming an LLC or corporation, we advise you to enlist the services of a professional, which can cost $50 to $300 a year.
7. Acquire federal and state tax IDs
Now you should obtain a Federal Employer Identification Number (EIN), which is like a social security number for a business and allows you to open bank accounts, handle payroll, and file taxes.
Each state has its own laws and taxes regarding businesses. LLC’s and corporations in Delaware must pay an annual franchise tax, which is a minimum of $175. The Division of Corporations offers a guide businesses can use to calculate the franchise tax they must pay.
8. Open business banking and credit accounts
Opening a bank account for your business is crucial because it allows you to separate company assets from your personal assets, and makes filing taxes a lot easier. This is a recommended step, even if you are operating a sole proprietorship.
It’s also a wise idea to obtain a credit card for your business because it will help you isolate business expenses and build up credit for your company, which may help in securing investment in later stages.
Banks operating in Delaware good for small businesses
9. Get the necessary licenses and permits
Depending on the type of business you are opening, you may need to apply for a number of permits and licenses to operate legally. For example, a restaurant will need a liquor license, and a pawn shop will need a reseller’s license. The paperwork may prove a hassle, but it’s a necessary ordeal that will protect you from fines, lawsuits, and other legal hazards.
Delaware.gov hosts a convenient registration and licensing portal for companies to acquire the licenses and permits they need to do business in the state. Simply create an account and follow the step-by-step instructions. You can also check out the index of industries regulated in Delaware for more information on specific licenses and permits.
10. Choose a location
Whether you are running an online business or opening a restaurant, location is everything. Be aware of the demographics of the neighborhood or town that you are considering: Are the local residents likely to visit your business? Will nearby competitors take a share of your potential profits?
As the second smallest state in the U.S., Delaware makes it easy for entrepreneurs to choose a location for their business by limiting the available options. Wilmington, the state’s largest city, was recently ranked one of the top 20 U.S. small cities to launch a business in a study by Verizon. With its strong economy and well-educated populace, Wilmington provides a great environment for entrepreneurs to launch a new company.
11. Get insured
No matter what type of business you form, buying insurance coverage to protect yourself in the case of property damage or legal action is a good idea. In fact, businesses with employees are required by the federal government to have two types of insurance, while others are strongly encouraged or required at the state level, depending on your business type. Consult with a licensed insurance agent to find out which types of insurance you should get.
Required forms of insurance:
- Workers’ compensation: Covers medical costs and disability benefits if an employee is injured or becomes ill on the job.
- Unemployment insurance: Provides benefits to workers after a loss of job through no personal fault.
Recommended forms of insurance:
- Professional liability insurance: Covers losses as a result of property damage, medical expenses, libel, slander, and negligence claims.
- Commercial property insurance: Covers property damage to business owned properties and possessions as a result of fire, theft, or storm.
- Disability insurance: Provides short-term benefits for employees suffering an illness or injury. Required in certain states such as California, New York, and Hawaii.
12. Develop an internet presence
Establishing an identity on the web is an important investment in a business’s future development. Here are some key steps in the process:
- Register a domain name for a company website (You can use domain.com, Bluehost, GoDaddy.com, Namecheap.com). Design the website and fill it with content.
- Create profiles on the popular social media services (Twitter, Facebook, Instagram)
- Register a Google profile for your business
- Create accounts on review sites such as Yelp, Google Reviews, and TripAdvisor
Delaware small business resources
- Delaware Division of Corporations – Forms necessary for registering your business, and additional resources and information for entrepreneurs can be found here.
- Delaware One Stop – Your portal for licensing your business and renewing existing licenses in Delaware.
- Delaware Division of Small Business – The state government division tasked with assisting small business owners. You can connect with almost 100 organizations for support and services through the site’s search.
- Delaware Small Business Development Council – A statewide organization with a plethora of resources and information for Delaware entrepreneurs, including free advising opportunities and a calendar of upcoming events.
- SBA: Delaware – Delaware district office of the U.S. Small Business Administration.
- SCORE: Delaware – The Delaware chapter of the nation’s largest business mentoring network.
- University of Delaware: Office of Economic Innovation & Partnerships – Utilizes the resources and talent of the state’s largest university to aid local area startups.
- Delaware Innovation Space – A thriving incubation program focused on aiding entrepreneurs in the biotech, advanced materials, and healthcare fields.
- Emerging Enterprise Center – A Wilmington-based incubator that has boosted 42 companies that have generated $62 million in revenues while in the program.
- Delaware List of Registered Agents – An exhaustive directory of registered agents available for hire in Delaware to assist you in forming an LLC or corporation.