Delaware LLC: Everything You Need to Know
A Delaware LLC, or limited liability company, is a type of business entity created by filing the Certificate of Formation with the Delaware Secretary of State.7 min read
2. Why Form a Delaware LLC?
3. Forming a Delaware LLC from Another State
4. How to Form a Delaware LLC
5. Alternative Entity Tax
6. Benefits of Incorporating in Other States
What Is a Delaware LLC?
A Delaware LLC, or limited liability company, is a type of business entity created by filing the Certificate of Formation with the Delaware Secretary of State. It creates a legal existence separate from its owners. Owners and managers are not personally liable for any of the company's debts.
A contract drafted by the company's members called the Operating Agreement outlines the structure of a Delaware LLC and the rules that govern the members, or owners, of the LLC. The Operating Agreement is legally binding and enforceable by every person that signs it. The members are free to organize the company however they see fit. The can create their own terms for governing, operating, and overseeing their LLC.
The first Delaware LLC was formed on October 1, 1993, when the Delaware Limited Liability Company Act first made the LLC a legitimate business entity. Right now about two-thirds of all of the companies that are formed in Delaware are LLCs. In 1998, 87,729 LLCs were formed in Delaware. In 2006, it reached 145,630, and in 2014, the number of Delaware LLCs grew to 168,966.
Why Form a Delaware LLC?
There are several reasons why you may want to file your LLC in the state of Delaware:
- It is simple and secure. Of all the LLCs in the country, the Delaware LLC is the easiest to form. You only need to send a minimal amount of information on your formation documents. Besides being easy and quick, it also helps to keep your identity and personal information secure. LLCs in Delaware don't need to file annual reports, so your information remains secure even after filing.
- There are tax exemptions. The state of Delaware tries to keep up a healthy business atmosphere and offers several tax benefits that other states don't. Delaware doesn't tax "intangible income" like patent and trademark leases. They have also created incentives for LLCs formed in Delaware but don't operate in Delaware. For example, you don't pay state income tax if your LLC in Delaware doesn't actually do business in Delaware.
- There is no Double Taxation. If you are a Delaware LLC, you have flexible tax options. You can choose to be taxed as a pass-through entity, an S Corp, or a C Corp. Delaware LLCs pass profits directly to their members or owners, and the LLC's profits are only taxed once as personal income.
- Delaware has strong business laws. Delaware offers the best-known, most carefully chosen business laws in the U.S. Delaware has its own court specifically for businesses called the Court of Chancery. You argue cases brought to the Court of Chancery in front of judges, not juries. Any legal dispute you have has likely already been argued in the Court of Chancery, so businesses can know ahead of time whether to fight or settle. The Court of Chancery also quickly handles any disputes in a matter of weeks, not years.
- There are no business licenses required. Delaware LLCs that do not do business in Delaware are not required to get a business license. They also do not need to register with the Department of Revenue or pay Delaware's gross receipts tax.
- There are fewer formalities. LLCs in Delaware do not file annual reports. Instead, they simply pay a flat $300 annual tax. It's due on June 1 every year and is easily paid online. Delaware LLCs need less paperwork and administrative formalities than corporations. They don't need to hold annual shareholders or board of directors meetings.
- You can own and manage almost anything with a Delaware LLC. Anything from single-person sales or consulting businesses to large commercial properties can constitute as a Delaware LLC. You can run an active business or hold passive assets such as real estate or intellectual property.
- Asset Protection Against Creditors. Delaware LLCs have an increased asset protection against their creditors. If one of the members of an LLC has a ruling filed against him or her, a creditor cannot attack the LLC or any part of the LLC's assets. This protects all the other members of the company.
- There are no minimum capital requirements. You can form a Delaware LLC with only a few hundred dollars. There is not a minimum amount of money required to form.
- It provides strong contract protections. The Delaware Limited Liability Company Act governs all Delaware LLCs, giving them a firm legal foundation. This means that any provisions placed in your operating agreement are legally enforceable thanks to the §18-502, Liability for Contribution, which states,
- "Except as provided in a limited liability company agreement, a member is obligated to a limited liability company to perform any promise to contribute cash or property or to perform services, even if the member is unable to perform because of death, disability or any other reason. If a member does not make the required contribution of property or services, the member is obligated at the option of the limited liability company to contribute cash equal to that portion of the agreed value (as stated in the records of the limited liability company) of the contribution that has not been made. The foregoing option shall be in addition to, and not in lieu of, any other rights, including the right to specific performance, that the limited liability company may have against such member under the limited liability company agreement or applicable law."
Forming a Delaware LLC from Another State
You can form an LLC in Delaware without living in Delaware, without visiting Delaware, without opening an office, or keeping a bank account in Delaware. The only thing the Delaware LLC Act requires is that a company incorporated in Delaware has a Delaware Registered Agent with a Delaware street address.
There are several incentives for out-of-state businesses to form Delaware LLCs:
- You don't pay sales tax on goods and services.
- You don't pay any state income tax.
- You are taxed as an S Corporation.
- There is no ad valorem tax also known as VAT.
- You don't have to pay any intangible personal property tax.
How to Form a Delaware LLC
Forming a Delaware LLC is simple and quick.
Simply file a Certificate of Formation with the Delaware Division of Corporations. The following is all you need to include on the form:
- The name of your Delaware LLC, which you'll need to be approved. To make sure that it is, make sure that it is easily distinguished from other LLCs and includes words required of LLCs. If you are unsure, you can check the availability of your preferred name before filing your LLC formation documents. Be sure to also check if the website and email are available for the company name before selecting it.
- The name and address of your Delaware registered agent.
- The duration of the LLC.
- The date of formation along with your name and signature or that of the person authorized to form the LLC.
You can then mail or fax the completed Certificate of Formation to the Division of Corporations in Delaware. Be sure to include the Division of Corporation's cover sheet and payment information to cover the $90 filing fee. The registration of your Delaware LLC will take about three weeks. You can choose to pay an addition $100 for same day filing or an extra $50 for 24-hour filing.
The Division of Corporations will charge $200 for late payments. If the payment is late, interest accrues at 1.5 percent per month.
If you are registering a Delaware LLC from outside of Delaware, your next step will be to find a registered agent. Your chosen registered agent must be a resident of Delaware or a Delaware-based corporation authorized to transact business in Delaware. You can choose an individual within your company or hire an agent who deals with Delaware LLCs.
You also need to make sure that you comply with all the tax and regulatory requirements. These can include the following:
- EIN. If an LLC has more than one member, it needs to get an IRS Employer Identification Number (EIN). If you form a one-member LLC, you only need to get an EIN for it there will be other employees or you choose to have it taxed as a corporation instead of a sole proprietorship.
- Business Licenses. You may need to get a business license depending on the type and location of the business. If your business is in a state other than Delaware, you will have to check with that state to see if you need to register other local and state business licenses.
- Insurance: Depending on what state you are operating in, you may need to get workers compensation insurance. While it is not often required, you may also want to get general liability insurance for your company.
Alternative Entity Tax
You'll need to pay your Alternative Entity Tax every year on or before June 1. Your registered agent will receive a notice every December. Any LLCs that are operating in Delaware need to pay Alternative Entity Tax. You incur a penalty fee for late or unpaid taxes as well as interest for every month that the tax is not paid.
Benefits of Incorporating in Other States
While Delaware remains a popular state to form an LLC, other states are trying to create similar business environments. Nevada is one of those states. Some advantages to forming a corporation or LLC in Nevada include the following:
- There is no state corporate income tax, and they impose no fees on corporate shares.
- There is no personal income tax or franchise tax for corporations or LLCs besides the first and annual statement fees.
- Shareholders, directors, and officers of a corporation or an LLC do not need to live in Nevada.
It is important to consider whether you will need to register to transact business in another state to the one you form your company in. Corporations and LLCs are considered "foreign" in every state besides the one that they register their company in. If you plan to do most of your business in other states, you should consider the fees of those states to make sure you are choosing the right place to incorporate.
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