How to Start an LLC in Delaware? (In 10 Easy Steps)
Starting a Limited Liability Company in Delaware is a popular choice for many entrepreneurs due to the state's business-friendly laws and favorable tax policies. The process of establishing an LLC in Delaware is relatively straightforward and offers numerous benefits, including liability protection, and operational flexibility.
As an experienced business advisor specializing in LLCs, I will cover all the rules and regulations that apply to new businesses registered as LLCs in Delaware.
This guide provides a comprehensive roadmap for navigating the process of setting up an LLC in Delaware. From understanding the legal benefits and protections offered by the state to following the easy steps for registration and compliance,
- Starting an LLC in Delaware may be accomplished by finding a name for the company, employing a registered agent, filing a Certificate of Formation, creating an Operating Agreement and obtaining an Employer Identification Number.
- An LLC in Delaware will benefit from personal asset liability protection, pass-through taxation and flexible structure and management.
- The growth in Delaware's business sector, as evidenced by a remarkable 23.6% increase in job creation directly attributed to businesses, highlights the state's supportive ecosystem for burgeoning LLCs, according to a 2023 Fox Business report.
- In my opinion, Delaware's streamlined process and beneficial business environment make it an appealing choice for entrepreneurs looking to start an LLC.
How to Form an LLC in Delaware
Forming an LLC in Delaware, involves the following simple steps.
1. Choose the Type of Your Delaware LLC (Mandatory)
When choosing the type of your Delaware LLC, you typically have two main options: a Single-Member LLC or a Multi-Member LLC.
- Simplicity in management and decision-making, as there's only one owner.
- Easier tax filing process since the LLC is treated as a disregarded entity for tax purposes.
- Less paperwork and lower formation costs compared to corporations.
- Limited resources as you rely on a single member's assets and skills.
- Potentially perceived as less credible by investors and banks compared to a multi-member LLC or corporation.
- Ability to pool resources from multiple members, enhancing capital and skills.
- More attractive to investors and lenders due to the shared responsibility.
- Flexibility in profit distribution among members.
- More complex management and decision-making processes.
- The need for an operating agreement outlining roles and profit shares.
- Potentially higher legal and accounting costs to manage multi-member complexities.
Each structure offers distinct benefits and challenges, and the choice largely depends on your business needs and goals.
In my experience as a business consultant, I've seen clients benefit significantly from choosing the right LLC structure.
For example, a client once opted for a Single-Member LLC due to its simplicity and ease of management, which was crucial for their solo entrepreneurial venture. This decision streamlined their tax filing process and minimized administrative burdens, allowing them to focus more on business growth.
2. Choose a Name for Your LLC (Mandatory)
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, although there are more costs involved in starting an LLC in Delaware.
Read More: Delaware LLC Lookup
3. Select a Registered Agent (Mandatory)
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.
4. File Delaware Certificate of Formation (Mandatory)
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 are used for corporations and other companies. However, it applies explicitly to limited liability companies.
"Delaware Certificate of Formation should contain information about your LLC, including the name, address, business purpose of the certificate holder (the members), and the registered agent's contact information."
- Lou Viveros, Growth & Transition Advisor of Venture Smarter
Only an authorized entity can sign a Certificate of Formation.
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.
Steps to Take After Forming an LLC in Delaware
5. Create an LLC Operating Agreement (Optional, but Recommended)
After forming a Delaware LLC, there are other things to consider regarding the company including:
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 pertinent information is included within it.
You should file your operating agreement with the Delaware Secretary of State.
6. Apply for an Employer Identification Number (EIN) (Optional, but Recommended)
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.
To apply for your employer identification number, go to the Internal Revenue Service website for more detailed information.
7. Open an LLC Bank Account (Optional, but Recommended)
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.
A separate business bank account helps organize your business expenses and income more efficiently.
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.
8. File Your Delaware LLC Annual Report (Mandatory)
You are required to file the annual report. It typically includes essential information about your LLC, such as the names and addresses of the members or managers, the registered agent, and the principal business address.
In Delaware, the annual report for LLCs is due on or before June 1st of each year. It's crucial to file this report on time to maintain good standing with the state and avoid late penalties.
The filing fee for the annual report is $300. This fee is standard for all LLCs regardless of size or income. The process can usually be completed online through the Delaware Division of Corporations website, which is convenient and accessible.
Remember, adhering to these annual filing requirements and deadlines is key to the smooth operation and legal integrity of your LLC.
9. Obtain Business Licenses and Permits
In Delaware, obtaining the appropriate business licenses and permits is essential for legal operation. The specific requirements can vary based on the type of business, its location, and the industry.
Here are some examples of licenses and permits you might need:
- General Business License: Required for almost every type of business, obtainable through the Delaware Division of Revenue. This license is a basic necessity for operating legally in the state.
- Professional and Occupational Licenses: If your business operates in a regulated profession (e.g., medical services, legal advice, real estate), you'll need a professional license from the respective Delaware professional licensing board.
- Health Permits: Necessary for businesses involved in food service, healthcare, and certain other industries. This is usually obtained through the Delaware Division of Public Health.
- Building and Zoning Permits: If you're constructing a new business location or altering an existing one, these permits from your local city or county government are required.
- Environmental Permits: If your business activities could impact the environment (e.g., waste disposal, air emissions), you may need specific permits from the Delaware Department of Natural Resources and Environmental Control.
- Sales Tax License: If you're selling goods or certain services, you'll need to register for a sales tax license with the Delaware Division of Revenue.
10. Choosing Your Tax Structure
Check our guide to see when the LLC taxes are due in Delaware.
- What is Delaware Series LLC
- Best LLC Services in Delaware
- How Long It Takes to Start an LLC in Delaware
- How to Cancel an LLC in Delaware
Benefits and Drawbacks of an LLC in Delaware
- Favorable Legal Environment: Delaware is renowned for its Court of Chancery, which specializes in corporate law. This court provides a more predictable and business-friendly legal environment. This favorable setting is reflected in the robust business activity, as evidenced by the opening of 4,573 Delaware establishments between March 2021 and March 2022, according to data from the US Small Business Administration .
- Flexible Corporate Laws: Delaware's corporate laws are considered to be some of the most flexible in the United States. This flexibility allows LLCs to structure their business in a way that best suits their needs.
- Privacy: Delaware does not require LLCs to disclose the names of their members or managers in the filing documents. This can provide a significant level of privacy for business owners.
- Tax Advantages: Delaware does not impose state income tax on LLCs that do not conduct business within the state. Additionally, there are no inheritance taxes on stock held by non-residents.
- Attracting Investors: Many investors and venture capitalists prefer businesses incorporated in Delaware due to its predictable legal system and business-friendly laws.
- Franchise Taxes: While Delaware offers tax advantages, LLCs are still subject to an annual franchise tax. This can be a drawback for smaller businesses.
- Complexity in Operating Out-of-State: If your LLC is operating primarily outside of Delaware, you may need to qualify as a foreign entity in your operating state, adding more complexity and potential costs.
- Legal Costs: Due to the sophisticated nature of Delaware's corporate law, legal advice can be more expensive, especially if it involves specialized corporate lawyers familiar with Delaware law.
DIY vs. Professional LLC Formation
When forming a Limited Liability Company, one key decision is whether to do it yourself (DIY) or hire a professional service. Both approaches have their pros and cons, and the right choice depends on individual circumstances.
DIY LLC Formation
- Cost-Effective: DIY is generally less expensive. You only have to pay the state filing fees.
- Learning Experience: Handling the process yourself can provide valuable insights into the legal and operational aspects of your business.
- Direct Control: You have full control over the formation process and can make immediate adjustments as needed.
- Time-Consuming: The process can be time-intensive, requiring you to research and understand various legal requirements.
- Risk of Errors: Without professional guidance, there's a higher risk of making mistakes in the filing process, which can lead to delays or legal issues.
- Limited Legal Knowledge: If you're not familiar with corporate law, you might miss important legal nuances or state-specific regulations.
Professional LLC Formation
- Expertise and Experience: Professionals are knowledgeable about the legal aspects of LLC formation, reducing the risk of errors.
- Time-Saving: Hiring a service can save you time, allowing you to focus on other aspects of your business.
- Compliance Assistance: Many services offer ongoing compliance support, helping to ensure your LLC remains in good standing.
- Peace of Mind: Professional assistance can provide reassurance that the formation process is handled correctly.
- Cost: Professional services are more expensive than the DIY approach, as they include service fees in addition to state filing fees.
- Less Personal Control: You have less direct control over the process, and it may take longer to implement specific requests or changes.
- Variability in Service Quality: The quality and thoroughness of services can vary widely between providers.
Your choice between DIY and professional LLC formation should be based on your comfort with legal processes, available time, budget, and the specific needs of your business. If cost is a primary concern and you're willing to invest time in learning, DIY might be suitable.
However, if you value expertise, time-saving, and peace of mind, especially in complex legal landscapes, professional services might be the better choice. Ultimately, the decision should align with your business goals and personal preferences.
Is There an Advantage to Starting a Delaware LLC?
There is an advantage to starting a Delaware LLC. 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.
Is a Foreign LLC Allowed in Delaware?
Yes, Delaware allows the formation of Foreign LLCs. A Foreign LLC refers to an LLC that is registered in another state but wishes to conduct business in Delaware. To operate in Delaware, the foreign LLC must file a Certificate of Registration with the Delaware Secretary of State and appoint a registered agent in the state.
Delaware LLC Formation
There are certain steps to be taken when forming a Delaware LLC. 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.
We have used ZenBusiness to launch some of our businesses and those of our clients, and we strongly advise using a professional provider to handle your business formation.
They can guide you through each step without error so that your company will always remain compliant with Delaware state laws.