How to start an LLC in Delaware: What are the Advantages?

 

Are you looking to start an LLC in Delaware? Consider forming a limited liability company (LLC). Delaware is known for its favorable business environment, strong legal protections, tax benefits, and flexible management structures. Whether you’re a new entrepreneur or an established business owner, forming an LLC in Delaware is a smart option. So, let’s dive in and learn how to make it happen!

 

How to start an LLC in Delaware

 

1. Find a Name for Your Company

A good company name should be memorable, easy to pronounce, and relevant to your business. It should also be relatable to the products you will be selling.

Some other requirements for naming a Delaware LLC include the following:

• The name must include the words “Limited Liability Company” or “LLC.”
• The name cannot include words that imply it’s a different entity type, such as “corporation” or “incorporated.”
• The name cannot contain certain words that the state restricts, such as “bank” or “insurance.”
• The name must be clear to the public.

When brainstorming names, consider the message you want to convey to customers and the impression you want to leave. It’s a good idea to have several options if your first choice is unavailable or rejected by the state.

Once you have a name in mind, do a thorough search to ensure it’s not already trademarked or being used by another business. If the name is available, you can reserve it for 120 days by filing a Name Reservation Request with the Delaware Division of Corporations.

 

2. Pick an Agent

A registered agent is a person or company who will receive legal notices and other important documents for your business.

When selecting a registered agent, choosing someone reliable and trustworthy is important. They should have a good reputation and be experienced in handling legal matters. Additionally, they should have a physical address in Delaware, as PO boxes are not accepted.

You can choose to be your registered agent, but this may not be the best option if you are unavailable during regular business hours or want to maintain privacy for your address.

 

3. Draft and File a Certificate of Formation of an LLC in Delaware

This document officially creates your Delaware LLC and includes essential details such as the company name, address, registered agent information, and management structure.

To draft the Certificate of Formation, you can use a template provided by the Division of Corporations or create a document that meets the state’s requirements. The document must be signed by at least one member of the LLC and include a cover memo with the filing fee.

Once your Certificate of Formation is filed and approved by the state, you will receive a stamped copy as proof of your LLC’s existence. Keeping this document safe and providing a copy to your registered agent is essential. 

 

4. Make an Operating Agreement

An operating agreement is a legal document that outlines your LLC’s ownership and management structure, as well as the rights and responsibilities of members. It is not required by Delaware law, but having one can help prevent disputes and ensure the smooth operation of your business.

To make an operating agreement, you should include the following elements:

• The name of your LLC and its purpose.
• The names and addresses of all members.
• The capital contributions and ownership percentages of each member.
• The management structure of the LLC.
• The roles and responsibilities of each member.
• Rules for holding meetings and making decisions.
• The process for admitting or removing members.
• How profits and losses will be allocated and distributed.
• How the LLC can be dissolved if necessary.

Once you have drafted your operating agreement, all members should review and sign it to show their agreement. You should keep a copy of the agreement on file and ensure all members can access it. You should also review and update the agreement as needed to reflect any changes in your business structure or membership.

 

5. Apply for an Employer Identification Number

An EIN is a unique nine-digit number assigned by the Internal Revenue Service (IRS) that identifies your business for tax purposes. 

You can apply online, by mail, fax, or by phone. To apply, you must provide basic information about your LLC, such as its name, address, and structure. You must also provide the name, Social Security number, or Taxpayer Identification Number of the person responsible for managing the LLC’s taxes.

One of the main challenges you might face when applying for an EIN is ensuring that all the information you provide is accurate and up-to-date. Any errors or inconsistencies could delay the processing of your application or lead to complications later on. Another challenge could be if you are not a US citizen or resident, you might face additional documentation requirements to obtain an EIN.

Despite these challenges, having an EIN offers several benefits for your business. For instance, it allows you to open a business bank account, hire employees, and apply for business licenses and permits. It also helps you to separate your personal and business finances, which is vital for liability protection and tax purposes.

 

6. Don’t Forget Franchise Tax

Delaware requires businesses to pay an annual franchise tax to maintain its favorable business environment. This tax is paid by all LLCs formed in the state, regardless of whether they are active or inactive. Your LLC is required to make your first payment in the year following the approval of your LLC. To pay the tax, LLCs must file by June 1st of each year. The report includes basic information about the LLC, such as its name and entity number, and must be filed online with the Delaware Division of Corporations.

Failure to pay the tax can result in penalties, interest, and the loss of good standing status. If an LLC fails to pay the fee, the state may also take legal action to dissolve the LLC.

 

 

Advantages of Forming an LLC in Delaware

 

1. Tax Advantages

A Delaware LLC has several tax advantages, such as not being required to pay state income tax on profits earned outside Delaware. Besides, they are only required to pay a franchise tax in the second year of operation, allowing for a smoother startup process. Unlike many other states in the United States, Delaware does not impose a sales tax on the sales of goods or services. Delaware also offers a low personal income tax rate, which benefits LLC members who report business profits on their tax returns. Another tax advantage of Delaware LLCs is the ability to transfer assets between members without incurring tax consequences. This perk allows for more flexibility in managing business assets and can benefit estate planning.

 

2. Access to Capital

Delaware LLCs can tap into the state’s offshore financial services through its role as a tax haven. This opportunity is particularly beneficial for companies looking to raise capital from foreign investors.

The Delaware Division of Corporations also provides loans to small businesses, especially services and technology companies that need working capital. It also offers loan guarantees to local banks, helping them to provide business loans with lower collateral requirements.

 

3. Ease of Formation

The state’s LLC formation kit includes all the legal documents necessary to start a business and instructs entrepreneurs on completing them. Additionally, they can take advantage of Delaware’s one-day turnaround for business formation and initial registration with the state.

The state also offers an online application process for registering with Delaware’s Office of the Secretary of State, making it easier for entrepreneurs to get their businesses up and running quickly.

 

4. Business-Friendly Laws

Delaware’s business environment benefits entrepreneurs by allowing them to operate profitable businesses without worrying about litigation or regulatory oversight. The state also provides an aggressive and innovative patent system that protects intellectual property for businesses looking to protect their market share.

 

5. State-of-the-art infrastructure

Delaware has an advanced network of public infrastructure, including high-speed Internet and electricity. The state’s public transportation system includes two light rail lines, one regional bus line, and a ferry that connects the Wilmington area with Cape May. With these transportation options, entrepreneurs can easily access business opportunities throughout Delaware and neighboring states.

 

Bottom-line

In Delaware, starting a company is easy and realistic. The state provides for low personal taxes and has a highly reliable infrastructure and legal system that protects businesses from litigation risks. The state also provides a clean capital market. For these reasons, Delaware remains the first choice among US business owners who want to start an LLC.