Delaware Corporate Law: DGCL, Formation, and Franchise Tax

Delaware corporate law is the body of statute and case law — centered on the Delaware General Corporation Law (DGCL) in Title 8 of the Delaware Code and interpreted by the Court of Chancery — that governs how a Delaware corporation is formed, how its directors and officers must act, what it owes the state each year, and how it may be sued or wound up. The statute is written as an enabling framework rather than a prescriptive one, which is why so many corporations choose Delaware even when they do no business there.

Why Companies Incorporate in Delaware

More than two-thirds of Fortune 500 companies are incorporated in Delaware.¹ Two features of the system explain the pull.

The first is the DGCL itself. Rather than dictating how a company must be run, it supplies defaults that corporations can rewrite in their certificate of incorporation and bylaws. Section 141(a) gives the board of directors authority to manage the business and affairs of the corporation unless the certificate assigns those powers differently.² Section 109 lets bylaws cover anything related to the corporation’s business, affairs, and the rights of stockholders, directors, and officers, so long as they don’t conflict with the certificate or state law.³ Stockholders always keep the power to adopt or amend bylaws; the certificate can also grant that power to the board.

The second is the Court of Chancery. It is a court of equity with broad jurisdiction over corporate disputes, fiduciary matters, and commercial conflicts, and it does not use juries for standard corporate cases.⁴⁵ Chancellors and vice chancellors decide matters directly, which produces a deep body of corporate opinions. When a novel governance question comes up, there is usually a Chancery decision on point.

What the Certificate of Incorporation Must Include

The certificate of incorporation is the founding document that brings a Delaware corporation into existence. Section 102(a) requires a few specific elements. The corporate name must include a word like “corporation,” “company,” “incorporated,” or an abbreviation such as “Corp.” or “Inc.,” and it must be distinguishable from other entities already on file with the Division of Corporations.⁶

Beyond the name, the certificate must state:

A registered agent with a physical Delaware address to receive legal documents and service of process.⁷
A corporate purpose, which can be as broad as “any lawful activity.”
The total number of authorized shares, along with par value (if any) for each class.
The name and mailing address of the incorporator.

Optional provisions under Section 102(b) include restrictions on the business the corporation may conduct, internal-affairs rules, and the director exculpation clause discussed below.⁶ Official forms are available from the Division of Corporations.⁸

Multiple Classes of Stock

Section 151 lets a corporation issue one or more classes of stock, each with different voting powers, dividend rights, liquidation preferences, and conversion features. The certificate can spell out the terms directly or delegate authority to the board to create series within a class by resolution, a structure commonly called “blank check” preferred stock.⁹ Venture-backed corporations typically authorize common stock for founders and employees alongside one or more series of preferred for investors. Getting the authorized share structure right from the start matters, because amending it later requires a stockholder vote.

Director and Officer Liability Under Section 102(b)(7)

Section 102(b)(7) allows the certificate to eliminate or limit the personal liability of directors and officers for monetary damages arising from breaches of the duty of care.⁶ The protection is not automatic. The corporation has to opt in by including an exculpation clause.

The statute draws hard lines around what exculpation cannot cover: breaches of the duty of loyalty, intentional misconduct or knowing violations of law, unlawful dividends or stock repurchases, and transactions where the director or officer received an improper personal benefit.⁶ Officers face an additional restriction: their exculpation does not apply to claims brought by or on behalf of the corporation itself, including stockholder derivative suits. Nearly every Delaware corporation includes a 102(b)(7) clause; without one, directors face personal exposure for honest business judgments that go wrong.

Filing Fees and Processing Times

The completed certificate goes to the Delaware Secretary of State, through the Division of Corporations’ online Document Upload Service or by mail to Dover. The base filing fee for a stock corporation is $109, and the total can climb depending on the number of authorized shares and the length of the document.¹⁰

Standard turnaround is usually a few business days. Expedited tiers, added on top of the base fee, are:

24-hour service: $50
Same-day service: $100
2-hour priority: $500
1-hour priority: $1,000

Once accepted, the state returns a stamped copy of the certificate confirming the corporation’s legal existence.¹⁰

What You Need to Do After Formation

Filing creates the entity. A few things still have to happen before it can operate.

Organizational Meeting

Section 108 requires an organizational meeting of either the incorporators or the initial directors (if they were named in the certificate) to adopt bylaws, elect directors if the incorporators are running the meeting, appoint officers, and handle whatever else is needed to get the corporation going.¹¹ Participants are entitled to at least two days’ written notice, though that can be waived. Most small corporations simply have all incorporators or directors sign a written consent in lieu of meeting.

Employer Identification Number

You will need an EIN from the IRS before the corporation can hire employees, open a bank account, or file tax returns. The online application is free and generates a number in minutes, but you need the responsible party’s Social Security number or ITIN, and the system cannot save a partial application. The IRS also limits applicants to one EIN per responsible party per day.¹²

Beneficial Ownership Reporting

The Corporate Transparency Act originally required most domestic corporations to report beneficial owners to FinCEN. As of March 2025, all entities formed in the United States are exempt. The reporting obligation now applies only to entities formed under foreign law that have registered to do business in a U.S. state.¹³ A Delaware corporation has no BOI filing obligation under the current rules.

Annual Franchise Tax and Report

Every active Delaware corporation owes an annual franchise tax, due by March 1 for the prior year, and must file an annual report at the same time. Both are submitted online.¹⁴ The annual report updates the state on the corporation’s directors, officers, registered agent, and principal place of business, and carries a $50 filing fee for non-exempt domestic corporations.

Miss March 1 and the penalty is $200, plus 1.5% monthly interest on the unpaid tax and penalty.¹⁴ The Secretary of State notifies delinquent corporations by November 30. If the tax and report are still unfiled after one year, the Governor voids the corporation’s charter by proclamation.¹⁵ A voided charter strips the corporation of its legal powers; it cannot bring lawsuits, enter contracts, or obtain financing until it is revived through payment of all back taxes, penalties, interest, and a reinstatement fee.

How to Calculate the Franchise Tax

Delaware offers two calculation methods. Calculate the tax both ways and pay whichever is lower. The total will never fall below $175 or climb above $200,000.¹⁶ This is where corporations overpay. If you have a large number of authorized shares but modest assets, the Assumed Par Value Capital Method can save you thousands.

Authorized Shares Method

This method keys off the number of shares the certificate authorizes:

5,000 shares or fewer: $175 (the minimum tax)
5,001 to 10,000 shares: $250
Each additional 10,000 shares (or fraction thereof): add $85, up to the $200,000 maximum

The math climbs fast. A corporation authorized to issue 10 million shares, common for venture-backed startups, would owe roughly $85,000 under this method alone.¹⁶

Assumed Par Value Capital Method

This method factors in actual financial size. You report total gross assets (from the corporation’s federal income tax return, Schedule L) and total issued shares on the annual report. The steps:

Divide total gross assets by total issued shares to find the assumed par value.
Multiply the assumed par value by the number of authorized shares whose stated par value is less than the assumed par. For shares with a stated par value higher than the assumed par, multiply those shares by their actual par value. Add the two results.
Apply the rate: $400 per million dollars of assumed par value capital (or fraction of a million), with a $400 minimum.

Where the certificate lists a par value higher than the assumed par value for any class, the higher figure applies to those shares.¹⁶ A startup with 10 million authorized shares, $500,000 in assets, and 1 million issued shares would have an assumed par value of $0.50, assumed par value capital of $5 million, and a tax of $2,000. That is compared to roughly $85,000 under the Authorized Shares Method. Running only one calculation is one of the most expensive mistakes a Delaware corporation can make.

Delaware Incorporation Does Not Cover Other States

Incorporating in Delaware does not give the corporation authority to do business everywhere. A physical presence, employees, or regular commercial activity in another state will usually trigger that state’s requirement to register as a “foreign corporation” and obtain a certificate of authority. What counts as doing business varies by state, and most states define the obligation by listing what does not count rather than what does.

The consequences of skipping that step are real. Nearly every state bars an unqualified foreign corporation from maintaining a lawsuit in state court until it registers and pays the associated fees and penalties. Monetary penalties range from a few hundred dollars to $10,000 or more depending on the state, and some states impose criminal liability on officers and agents who knowingly transact business without authority. Registration fees across states generally run from $70 to $750.

The reverse applies in Delaware itself: under Section 371, a corporation formed outside Delaware must pay $80 to the Secretary of State and file a certificate of existence from its home jurisdiction before doing business in Delaware through offices, agents, or representatives.¹⁷ Where you incorporate decides your corporate governance law. Where you actually operate decides which other states you also need to register in.

1
Delaware Division of Corporations. Annual Report Statistics
2
Delaware Code Online. Delaware Code Title 8 Section 141 – Board of Directors
3
Justia Law. Delaware Code Title 8 Section 109 – Bylaws
4
Delaware Judiciary. Jurisdiction of the Court of Chancery
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Delaware Code Online. Delaware Code Title 10 – Court of Chancery
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Justia Law. Delaware Code Title 8 Section 102 – Contents of Certificate of Incorporation
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Delaware Division of Corporations. Name Reservation
8
Delaware Division of Corporations. Corporate Forms and Certificates for a Corporation
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Justia Law. Delaware Code Title 8 Section 151 – Classes and Series of Stock
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Delaware Department of State. Division of Corporations Fee Schedule
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Delaware Code Online. Delaware Code Title 8 Section 108 – Organization Meeting
12
Internal Revenue Service. Get an Employer Identification Number
13
Financial Crimes Enforcement Network. Beneficial Ownership Information Reporting
14
Delaware Division of Corporations. Annual Report and Tax Instructions
15
Delaware Code Online. Delaware Code Title 8 Section 510 – Failure to Pay Tax
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Delaware Division of Corporations. How to Calculate Franchise Taxes
17
Justia Law. Delaware Code Title 8 Section 371 – Foreign Corporations