If you consider starting an LLC in Delaware, this article will help walk you through the process.
Start by reading about what an LLC is and how it is different from a corporation.
Find out if your business will be better off as an LLC or a corporation. Learn about the advantages of starting an LLC in Delaware, including low cost and ease of formation.
We will also discuss all the steps of LLC formation that you need to know so you can start your Delaware LLC today.
Finally, we'll cover all the rules and regulations that apply to new businesses registered as LLCs in Delaware - including those governing taxation, ownership structure restrictions on foreign companies operating as LLPs;
What Is a Limited Liability Company?
A limited liability company, or LLC for short, is a business structure that combines the personal liability protection of an incorporated entity with the tax benefits of filing as a partnership.
A limited liability company can easily be created in most states by following simple steps and paying applicable fees.
The exact process will vary from state to state - for example, not every state requires you to file biennial reports or sales taxes.
Delaware, for example, is one of the five states that doesn't impose a sales tax on taxable goods or services.
The Difference Between an LLC and a Corporation
An LLC has many of the same advantages as a corporation. It protects its owners from liability for business debts and claims, thereby shielding personal assets against lawsuits or creditors.
But unlike corporations, which require constant formal meetings to maintain their existence, an LLC doesn't need annual board meetings or record-keeping requirements that corporations have in place.
As far as taxes are concerned, corporations are considered separate entities from their owners, and as such, they must pay corporate taxes.
An LLC doesn't have to worry about this issue because LLC owners and LLCs are considered the same -- a pass-through entity that's transparent for tax purposes, which means it doesn't pay corporate taxes.
Starting a Delaware LLC is Easy
In order to start an LLC in Delaware, there are a couple of simple steps you need to follow.
In general, businesses start an LLC by filing a document called Articles of Organization with the Delaware Division of Corporations.
Before that happens, though, you'll need to choose a business name that's unique enough to differentiate your company from other businesses in the state.
Delaware LLC start-up fees are normally $90 (for articles of organization), but you can expect an additional fee if you use the online filing service of a registered agent service.
Step 1: Name Your Delaware LLC
Start a Delaware LLC by selecting a name for your business.
Your LLC name will need to be unique enough to not conflict with other businesses operating in the state.
To make sure no one else has already taken the same business name, check online using the search tool from the Delaware Division of Corporations.
If the LLC name is not already taken, reserve it by filing an application for name reservation with the Delaware Division of Corporations.
You can file this form online through your Delaware registered agent service, or you may mail in a hard copy to their business address.
The reservation filing fee is $75.
Step 2: Hire a Registered Agent
Every LLC must have a registered agent. The LLC's registered agent is an individual or business entity that is located in Delaware and resides there during the entire taxable year.
A registered agent will accept official service of process on behalf of your LLC, meaning that they ensure that people who need to deliver legal documents (like lawsuits) can find you and serve them properly.
A number of companies offer a registered agent service for a fee. You can find your own registered agent, but it's a good idea to do your research and get several quotes.
You can use Delaware registered agent services for an affordable price, usually no more than $49 a year, but it really depends on the company.
Step 3: File Delaware Certificate of Formation
A Delaware LLC certificate of formation is a legal document that you need to file with the Division of Corporations in order to form your LLC.
A certificate is similar to articles of organization (which you would file with an out-of-state business), which are used for corporations and other companies, but a certificate of formation applies explicitly to limited liability companies.
Delaware certificate of formation should contain information about your LLC, including the name, business purpose of the certificate holder (the members), and registered agent's contact information.
A certificate should also include a physical street address for the service of the process.
You can use this address to have legal documents sent to you or served on you by law enforcement agencies and other authorized entities that are listed in the document as having the right to do so.
Only an authorized entity can sign a certificate of formation.
Don't file the certificate with the Delaware Division of Corporations before you double-check everything.
Step 4: Create an LLC Operating Agreement
Creating operating agreements is the best way to protect yourself and your business.
An operating agreement should include important information about you, members of the LLC, how profits are split up among the members, what happens if a member leaves or dies, etc.
Delaware law does not mandate having an operating agreement. It's up to you to decide how elaborate your operating agreement is going to be.
You can use anything from a simple one-page document to a more complex legal contract, including addenda and exhibits.
It doesn't matter what kind of format or length your LLC operating agreement is in as long as all of the pertinent information is included within it.
You should file your operating agreement with the Delaware Secretary of State.
Step 5: Get an Employer Identification Number
Before registering your business with the Delaware Division of Corporations, you need to get an employer identification number (EIN).
This is a federal tax identification number for businesses in the United States that have employees. It serves as both your employer's and company's taxpayer ID.
In other words, if you don't hire employees, you do not need an EIN. However, if you have even a single employee, then it is required of you to obtain this tax ID from the IRS.
Even if you don't plan on hiring employees, it is still beneficial to have an EIN. You can use it for your business banking accounts, filing tax returns with the IRS and state agencies, and even for marketing purposes.
Once you establish a Delaware LLC, you will need this EIN so that you are able to open up bank accounts.
To apply for your employer identification number, go to the Internal Revenue Service website for more detailed information.
Open a Business Bank Account
There are a couple of reasons why business bank accounts are beneficial:
- They help you separate business and personal finances
- You're able to track business expenses and income for tax purposes. This is especially helpful when filing quarterly sales taxes or annual income taxes with state agencies.
Having a business bank account that's separate from your personal account allows you to be more organized in terms of business expenses and income.
For instance, business bank accounts allow you to have separate business credit cards or debit cards for making business purchases with ease.
In addition, it's also beneficial when filing taxes at the end of a business year because you can easily track expenses from various financial institutions in one place.
Check If You Need a Business License
Not every type of business is required to get a business license.
You can check with your city or county's business office for further clarification on the types of businesses that need to obtain business licenses before starting operations in Delaware.
Usually, professional LLCs need to get business licenses. Professional LLCs include those that provide professional services such as doctors, lawyers, and accountants.
Every state has different requirements for obtaining a business license.
For example, the California Business & Professions Code requires most businesses operating in California to obtain one before starting operations.
The situation in Delaware is the same, meaning all LLCs looking to conduct business in the state need to obtain a Delaware business license issued by the Division of Revenue.
Paying Taxes as a Delaware LLC
Just like S corporations, Delaware LLCs are pass-through entities, meaning they do not pay federal taxes.
Instead, the federal tax burden falls on the individual members or owners of an LLC.
Members in a Delaware limited liability company can elect either a C corporation or S corporation tax structure.
However, you can also choose default federal tax treatment, that is, be taxed according to the number of members.
In that case, your LLC is taxed as either a sole proprietorship or partnership.
Pay Alternative Entity Tax
Delaware LLCs have to pay an alternative entity tax of $300 if the LLC has no more than one member.
If it has two or more members, then alternative entity tax is calculated based on their distributive share of income and capital gains – i.e., what percentage each member is entitled to receive from profits and losses respectively after they're allocated among individual LLC owners.
This annual franchise tax is the only form of annual tax that an LLC in the state of Delaware needs to pay.
Is There an Advantage to Forming a Delaware LLC?
The biggest advantage of forming Delaware LLCs is the simplicity of doing so.
There are fewer steps involved, and it can be done online or with forms you download from the state government website.
Forming an LLC in any other state will require more paperwork, time, and money than forming one in Delaware.
How Much Does It Cost to Create a Delaware LLC?
It costs $90 to form an LLC in Delaware. If you want a name reservation, it will cost another $50.
The one-time filing fee for nonresidents of Delaware is also less than most other states at only$300. There are no additional taxes or filings.
How Much Does an LLC Cost per Year in Delaware?
An LLC in Delaware has an annual fee of $125. There is no minimum or a maximum number of members, and all it requires to form one in this state are the Articles of Organization ($90) and a name reservation ($50 for Delaware residents).
How Long Until My LLC Is Approved in Delaware?
It takes a few days to a week for your LLC application in Delaware to be approved.
You should receive your documentation within three business days, and then you can open up bank accounts or sign leases immediately after that because it will take only one more day until the certificate is filed with the state.
The entire process takes less than two weeks from start to finish.
Is a Foreign LLC Allowed in Delaware?
Yes, a foreign LLC in Delaware is allowed. This means that an LLC can operate in another state without forming a separate domestic entity there.
How to Dissolve a Delaware LLC?
To dissolve a Delaware LLC, you must file a certificate of dissolution with the state and provide all members with written notice of your intention to dissolve at least 30 days before filing.
Delaware LLC Formation: Conclusion
We hope this article has provided you with some information about LLCs in Delaware. If your goal is to set up an LLC by yourself and transact business, then keep the following tips in mind.
First, make sure that you have all of the necessary paperwork and documentation, such as an operating agreement, filled out correctly before submitting it for approval.
Don't forget to file your certificate with the Delaware Division of Corporations.
Second, take care not to miss any deadlines or requirements when establishing your business entity because missing these steps could lead to serious penalties or consequences later on down the line.
Finally, if you are unsure of what needs to be done next, don't hesitate to ask a professional for help at any point during the process.
They can guide you through each step without error so that your company will always remain compliant with Delaware state laws.