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How To Set Up An LLC In Delaware
Despite being a relatively small state, Delaware is a favorite amongst those looking to set up businesses because of its immense entrepreneurship opportunities. Another reason entrepreneurs prefer Delaware is the flexible tax policies in the state, such as lower taxes compared to other states and absolutely no sales tax. Plus, Delaware is one of the most business-friendly locations in the world. For these reasons, several limited liability companies (LLCs) are also set up in the state.
Definition
What is an LLC?
An LLC, or Limited Liability Company, is a business initiative or organization in the United States owned and operated by one or more people/members. The structure of an LLC offers protection to its owners from personally taking responsibility for any liabilities or debts relating to the business.
LLCs are hybrid structures, which means that they combine the characteristics of a sole proprietorship or partnership with those of a corporation. LLCs in Delaware are categorized as partnerships for the state’s income tax purposes. This is the case unless the LLC has been classified otherwise for federal income tax purposes.
Advantages
Advantages Of an LLC In Delaware
Several of the country’s biggest companies are rooted in Delaware. In truth, most companies operating in other states across the US also prefer setting up their business in this state because of the flexible terms and procedures.
One of the biggest advantages of setting up an LLC in Delaware is that one can do so with very little information and small filing fees, significantly reducing the hassle of legal filing procedures. However, there are several other benefits to initiating your business in this entrepreneur-favorite state.
Freedom for LLC members
A Delaware LLC also allows a huge degree of freedom to the business owners because the rules governing the entire body and its members are drafted by the owners themselves in a contract called the operating agreement in Delaware. This means that the LLC members can choose their own terms for their initiative within the confines of state laws. This legal freedom is unlike any other provided in the country.
Asset protection for members
In a Delaware LLC, members have significant asset protection. This means no member can be held responsible for a liability or debt sum higher than their original investment amount. This security against liability and creditors is irrespective of a member’s participation in management. This also means that in case of legal trouble, for example, if you are sued and the ruling is not in your favor, the ruling party can not annex the assets that fall directly under your LLC in Delaware.
Advantages for non-US resident aliens
It is not just US citizens that can benefit from the flexible policies that come with setting up an LLC in Delaware. Even non-resident US citizens can easily avoid taxes by operating an LLC, despite a non-US source of income.
Property purchase and avoiding legal trouble
When it comes to a single-member LLC in Delaware, there is an excellent opportunity to buy property without using your identity. In other words, a single-member LLC allows the owner to draft property purchase contracts under the LLC’s name without revealing their identity.
This, in turn, has several benefits. If public records are searched regarding a particular piece of property, no connection can be made to the owner since the property is not in their name. Conversely, if there is a legal judgment against your LLC, or if it is sued, the ruling party can not object to, question, or annex any property that does not fall under the LLC’s name.
Other advantages
In Delaware, the tax filing process takes less than an hour in most cases, as opposed to other states, where it can take a day or more. Furthermore, most investors are attracted to businesses in Delaware, so there are higher chances that your startup will attract decent funding if it is based in Delaware.
Disadvantages
Disadvantages of Starting a Delaware LLC
While there are numerous pros to starting a business in Delaware, there are certain cons, too. Before setting up your business in Delaware, or any other state, for that matter, it is crucial to pay as much attention to the disadvantages as the advantages of doing so. However, it should also be noted that most of these disadvantages are faced by out-of-state businesses instead of those based and operating in Delaware.
Meeting state requirements
Basing your company out of Delaware, even if you plan on operating it elsewhere, does not mean you will not have to meet the specific legal requirements of your home state. You will have to make all necessary filings in your state of operation and properly license your company there. You will have to file mandatory annual reports in your state and Delaware. This takes twice the work and expenses than it would if you simply started a business in your state of residence.
Legal representation
Strong legal representation is a vital requirement for any business. However, if you are an out-of-state business based in Delaware, you will have to look for attorneys and legal representatives that are licensed both in your home state and in Delaware. This is a long and difficult research process because most attorneys are licensed in a single state. If you find such a representative, chances are that your annual legal expenditure will also be many times more.
Traveling expenses
Although, in most cases, you would not have to be physically present in Delaware to run your company or for legal procedures, the case is different when it comes to legal procedures. Courts and legal proceedings require business owners to be present in person during hearings, which will be a huge hassle if you are not a Delaware resident. You would, therefore, find yourself spending large sums every year simply traveling to and from Delaware.
Lack of recognition for series LLCs
Delaware allows the formation of series LLCs, which means the integration of several smaller LLCs under the umbrella of one parent LLC. Although this is a huge advantage for companies operating within Delaware, it serves as a disadvantage to LLCs registered within the state but operating out of it.
This is because most courts of law do not recognize series LLCs. This business structure has yet to undergo legal tests to make it acceptable. However, until now, this model is not respected, and courts and authorities might refuse to recognize your separate assets and liabilities. This will, in turn, result in quite a lot of legal trouble in the future.
Legal loopholes
It may seem like a dream to be able to form your LLC in Delaware and operate it elsewhere, but in case of any missteps, you can find yourself in legal trouble. For example, you will have to file your LLC as a foreign entity in your home state if you have registered it in Delaware. If you do not, your company will be considered registered in two states under the same legal details. If the government of any of the states discovers this activity, you will face serious legal trouble and lawsuits.
Tax benefits are not for everyone
As unfortunate as it may sound, the all-famous tax benefits in Delaware are not fully beneficial for small and medium-scale businesses that are not physically located in Delaware. These businesses are defined as having less than $21.5 million in annual revenue and less than 1500 employees.
An important thing to remember about taxes is that they are to be paid in the state where the revenue is being generated instead of the state where the company is registered. Therefore, despite low revenue generation, small businesses still have to pay huge sums as taxes to their home state. Such a problem is not faced by small companies registered and operating within Delaware.
LLC Formation
How To Form an LLC In Delaware?
The process of forming an LLC in Delaware is fairly easy, but only if understood and followed correctly since there are several steps that need to be taken for a successful registration procedure.
- Choose a unique name for your business
- Filing the Certificate Of Formation
- Work with a Registered Agent
- Getting tax ID, licenses, and permits
- Formulating the Operating Document
Choose a unique name for your business
This is an important step in the filing process. You need to pick a name for your LLC that is not unique and available. No other business in the state of Delaware should have that name. There are several websites available that can help you check the state’s databases to see if your chosen name is available for use.
Ideally, you should have a name picked out beforehand, not just for legal purposes. Your business name is a significant part of your identity as a brand, and you should be aware of and satisfied with how the name looks and sounds.
Plus, although you may be able to change your business name at some point after registration, you will have to go through a lot of paperwork all over again. So, it is best to make a well-thought-out choice in advance.
Similarly, it is important to check whether a website domain with your selected name is available on the internet. If not, you may have to opt for an alternative name or make minor changes to the existing name. Again, you should do this before formally filing your LLC.
If you are unsure about a name, Delaware also offers a name reservation for a fee of $75. Through this online process, you can request for a preferred name to be held/reserved for 120 days so that a competitor does not take it.
Filing the Certificate Of Formation
Also known as the certificate of incorporation, this is the official application/filing process for an LLC that provides all necessary information about your company and yourself to the Delaware Division of Corporations. These forms can be filled in and submitted either online or by post. Download or print the form and correctly and carefully fill out all the required information on it.
Online, the form can be submitted using the uploading tool available on the website of the State of Delaware. If you choose to post it, make sure you attach a cover with your name, return address, and cellphone number on top of it. There is no fixed response time for requests, as all responses are sent via mail, and there is no guaranteed time for your response to reach you.
It is suggested to fill in and check all forms and documents carefully before submitting them. If you make an error in any of the documents you submitted during the filing process, it is imperative to apply for a certificate of correction as soon as possible.
Work with a Registered Agent
This is not a choice but a legal requirement of the state of Delaware that every business entity, including LLCs, has a certified agent in the state. This agent may be an individual resident of the state or another business identity. The only requirement is that they must be authorized to conduct business in Delaware and must be permanent residents of the state.
An LLC initiated in Delaware and physically located there can act as its registered agent. If a third-party registered agent is chosen, they should be informed properly beforehand.
Getting tax ID, licenses, and permits
Once your certificate of formation is approved, your LLC will need to apply for a Federal Tax ID number, sometimes called the Employer Identification Number (EIN). Similarly, depending on several factors, like your chosen market, you may also have to acquire certain permits and licenses from the state for your LLC.
Formulating the Operating Document
This is another crucial step but one that does not require the involvement of a third party. Once all the legal procedures are dealt with, the members of the LLC should work together on creating the standard rules and operating procedures for their company. This legal document should ideally cover all matters relating to the LLC, including, but not limited to, ownership shares and responsibilities.
It should be kept in mind that the operating document is not filed legally. Instead, it is formulated and maintained within the LLC. Nonetheless, this does not mean that it is of no legal use, as it is recognized and respected by courts of law where the circumstances allow.
Types of LLC
Which type of LLC is ideal for me?
Delaware is a popular choice for forming Limited Liability Companies (LLCs) due to its business-friendly laws and regulations. In Delaware, there are a few types of LLCs that you can choose from based on your business needs. I’ll break them down for you in simple terms so you can understand your options better.
- Traditional LLC: A traditional LLC is the most common type of LLC in Delaware. This structure provides limited liability protection to its owners (also known as members) and is generally easy to set up and manage. It’s suitable for small businesses, entrepreneurs, or even freelancers who want a separate legal entity for their business activities. In this type of LLC, you can have as many members as you want, and they can be individuals or other business entities.
- Series LLC: A Series LLC is a unique form of LLC available in Delaware. It’s designed for businesses that have multiple, distinct business lines or assets, and want to protect each one individually. This structure allows you to create separate “series” within the LLC, each with its own assets, liabilities, and management. The advantage of a Series LLC is that if one series faces legal or financial issues, the other series within the LLC remain unaffected. This type of LLC is often used by real estate investors or businesses with diverse investments or subsidiaries.
- Professional LLC (PLLC): A PLLC is a type of LLC specifically designed for professionals such as doctors, lawyers, architects, or accountants. In Delaware, certain licensed professions are required to form a PLLC instead of a traditional LLC. The main difference between a PLLC and a traditional LLC is that the members of a PLLC must be licensed professionals in the same field. This structure still provides limited liability protection but requires adherence to specific professional standards and regulations.
- Single-Member LLC: A Single-Member LLC is an LLC with only one owner. This type of LLC is suitable for solo entrepreneurs or individuals who want to separate their business activities from their personal finances. In Delaware, a Single-Member LLC is treated similarly to a traditional LLC, and it still provides limited liability protection for the owner. However, it’s essential to maintain proper records and separation of personal and business activities to uphold the limited liability protection.
- Multi-Member LLC: A Multi-Member LLC is an LLC with more than one owner. This type of LLC is suitable for businesses with multiple owners or partners who want to share in the management and profits of the company. In Delaware, a Multi-Member LLC can be managed by its members or by designated managers. The owners can decide on their respective ownership percentages and roles within the company through an operating agreement.
When deciding which type of LLC is best for your business, consider factors like the number of owners, the nature of your business activities, and your specific legal and financial requirements. It’s always a good idea to consult with a business attorney or professional advisor to ensure that you make the right choice for your situation.
LLC Taxes
Applicable LLC Taxes In Delaware
All business entities in Delaware are required to file annual reports and pay franchise taxes. However, for limited liability companies, these requirements are even more flexible. LLCs in Delaware are not required to file any annual report. Instead, they simply have to pay a flat annual tax amount of $300.
This amount should be paid by the first of June every year. This is the case if your LLC is registered as a partnership, in the case of a multi-member LLC, or as a disregarded entity, in the case of a single-member entity. If you have registered your LLC as a corporation, it will also be subject to the state’s tax laws.
Costs
Costs Of Forming an LLC In Delaware
Although the fee for LLC registration procedures in Delaware is low compared to other states, there are still quite a few expenses to be covered. It is best to designate a budget for these expenditures and stay in the know to avoid surprises.
Following are the costs for various steps in the filing process:
LLC Costs
Delaware LLC formation fee
$90
Registered agent fee (up to)
$300
Delaware annual franchise tax (minimum)
$300
Business license (if applicable)
Varies
Operating agreement preparation (optional)
$300+
Employer identification number (EIN)
$0
Comparisons
Is LLC The Best Entity For Me?
Maybe, LLC isn’t the right entity for you. Maybe it is a C-Corp. Only way to find out is to directly compare them all.
LLC vs Corporation (C-Corp)
Sole proprietorships and Limited Liability Companies (LLCs) are two of the most common business entities for individuals and small businesses. Learn what differentiates the two today.
LLC vs S-Corp
Not sure what business structure to choose? Learn about the key differences between LLC and S-Corp today.
LLC vs Sole Proprietorship
The primary difference is that an LLC provides limited liability protection for its owners, while a sole proprietorship does not.
FAQ
Frequently Asked Questions About Starting An LLC In Delaware
Here are the most commonly asked questions about forming an LLC business in the state of Delaware:
Delaware is one of the most popular destinations for entrepreneurship in the world. This is because of its excellent business opportunities due to flexible tax requirements and relatively easy legal procedures. And this is not only true for businesses physically located in Delaware. Instead, most businesses located all over the country and some even located abroad favor basing their companies in this state.
Delaware is a haven for business owners because of its corporate-friendly regulations. Plus, if a business is registered in the state but does not operate there, it can simply avoid the state’s sales tax. The filing process is easy and relatively smooth in most cases, but the owners do not have to be physically present for most procedures.
For forming an LLC in Delaware, you should have a business name decided and preferably have all required documents at hand. Then, you need to file for the certificate of formation with the Delaware Division of Corporations. This can be done either online or on paper. In the former method, you may simply upload the filled form on their website, while in the latter, you will have to mail the form, along with a front cover containing your information, to their office. Either way, you will have to pay a fee of $90.
There can be several reasons for dissolving an LLC, such as wishing to halt the business or aiming to set it up as a domestic entity in another state. If you wish to dissolve your LLC, you will have to file for a certificate of cancellation.
There are different forms available for this process, depending on whether you own a domestic LLC or one located abroad. Regardless of the type of form, the fee for filing for the certificate of cancellation for your Delaware LLC is $200.
The basic cost of forming an LLC in Delaware is filing for the certificate of formation or incorporation, which is $90 for domestic entities and $200 for foreign entities. The fee for obtaining the state’s business license is $50. Therefore, generally, domestic LLCs have to pay a total of $140 for incorporation. Additional costs may come from hiring a registered agent for your LLC, which can range from $49 to $300, or reserving a name for your business if you are unsure about a choice, which is $75.