A Delaware LLC is an excellent way to manage your business. In fact, Delaware is one of the most hyped-up states for businesses and for forming LLCs. The state indeed has business-friendly laws that can be very helpful for running a business.
In this guide on how to form an LLC in Delaware, we’ll cover the necessities required for forming your Delaware LLC. Let’s also consider a few things to do to keep running your Delaware LLC smoothly.
And we’ll also look into the hype. Should you really form an LLC in Delaware if you don’t live in the state? How far would the business-friendliness of the state actually affect you, if you were to take this route?
Let’s get started!
1. Choosing A Name For Your Delaware LLC
The first step is choosing a name for your LLC. Finding the right name for your LLC in Delaware can take some effort, but it’s important to get it right. The LLC name should be unique and distinguishable upon record.
So, not only should your chosen name not be the same as another existing entity in the state, it shouldn’t be confusingly similar either. Additionally, the name shouldn’t be misleading or present a false connection to the government or government agencies.
For example, using words like Inc, Corp, etc. in your LLC name isn’t allowed. Similarly, the name shouldn’t be similar to government agencies or departments like the FBI, CIA, Department of Revenue, and so on. The state may also restrict or ban the use of some words or terms if they’re considered offensive, vulgar, or have other issues.
A quick way to check for name availability is to run a search on the business name database of the Department of State: Division of Corporations website. This should give you a good idea of LLC name availability in Delaware.
The state also offers a different tool to check name availability. It’s possible (though not necessary) to reserve the name right after you’ve checked availability.
If you’ve got a name in mind, it’s also a good idea to search through the USPTO website to check for any possible trademark issues.
DE LLC Name Designators
Every LLC in Delaware must end its name with a proper designator. Well, LLC is the most common and popular designator. However, the state will accept any of the following:
- Limited Liability Company
Delaware LLC Name Reservation (Optional)
Going for a name reservation is a good choice if you have an available name for your LLC, but aren’t quite ready for setting up the LLC just yet.
You can reserve a name for your Delaware LLC for 120 days by using the Name Reservation Application made available by the Delaware Division of Corporations. Filing the application requires a fee of $75. The check or money order for the fee should be made payable to “Delaware Secretary of State”.
Should you need to renew your name reservation, you’ll have to file a Name Re-Reservation application. The filing fee cost for this application is $75. Once accepted, this application extends the name reservation by another 120 days.
2. Delaware LLC Registered Agent
Before you register LLC in Delaware, you’ll have to appoint a Registered Agent. This agent is a person or business entity that agrees to receive service of process on behalf of your LLC.
Service of process generally includes legal documents like lawsuits, summons, complaints, subpoenas, etc. The agent may also receive other documents like tax notices or official communication from the state. Your LLC’s Registered Agent is basically a point of contact between the LLC and the State of Delaware.
A Delaware LLC Registered Agent must maintain a physical street address in the state. PO Box addresses or similar services aren’t accepted. It is also important for a registered agent to maintain normal business hours (9 am to 5 pm) in case the service of process arrives.
As long as the above conditions are fulfilled, the following can take on the role of the Registered Agent:
- Any person who maintains a physical address in Delaware (this includes you, or your family/friends)
- A foreign or domestic business entity that is allowed to do business in Delaware and maintains an office in the state. This generally includes commercial registered agents, though other business entities may take on the role too.
Hiring a commercial registered agent is a fairly common practice. More so, because the popularity of the state as a business destination means that a lot of people from out-of-state start their LLC in Delaware. The Secretary of State website maintains a list of registered agents in the state.
3. Filing The Delaware Certificate Of Formation
Filing the Certificate of Formation is the key to starting your Delaware LLC. You can submit the certificate online or via mail. Earlier, the state also accepted submissions via fax, though that is no longer the case.
Whatever method you choose to file the Certificate of Formation, you’ll have to start with the form available on the Delaware Division of Corporations website. You may also need to include a filing cover memo to go along the submission.
If you intend to file for your LLC in Delaware online, there is no need to include a cover letter/cover memo. Once you’ve completed and signed the form for the Certificate of Formation, scan it to your computer as a pdf file. Then, you can head on to the Document Upload Service to upload the file. Relevant payments (filing fee) can be completed online too.
For now, Delaware’s eCorp filing system seems outdated for modern online services. We can hope that as a state well-regarded for its business-friendliness, Delaware will deploy a better solution in the future.
To file via mail, you’ll have to download and fill the form for Certificate of Formation and the cover memo. The payment is to be completed via check or money order. You can mail the documents to:
Delaware Division of Corporations
401 Federal Street – Suite 4
Dover, DE 19901
Cost Of Setting Up A Delaware LLC And Processing Time
The cost of forming a Delaware LLC (or the filing fee for the Certificate of Formation) is $90. This amount is relevant whether you choose to file via mail or online.
As for the processing time, the state usually takes 7-10 business days to process the Certificate of Formation. However, this can sometimes stretch on to as many as 5-6 weeks, depending on the volume of requests.
4. Get An Operating Agreement
Delaware doesn’t require LLCs in the state to have an operating agreement. However, it remains highly advisable for LLCs to put an agreement in place. Having an operating agreement demonstrates that your LLC is being run properly. It may also help maintain liability protection if your business ever ends up in court.
An operating agreement is sometimes referred to as the “constitution” of an LLC. That means you can make a detailed agreement that underlines various facets and policies of the company. These include, but aren’t limited to, the approach on taxation and hiring.
Moreover, the agreement for multi-member LLCs may include things like the roles and responsibilities of members, the percentage of the LLC owned by each member, distribution of profits, voting powers, and more.
While an operating agreement is very relevant for multi-member LLCs, single-member LLCs should have an agreement in place too.
5. Getting An Employer Identification Number (Federal Tax ID)
Once the Secretary of State has approved your Delaware LLC’s Certificate of Formation, you should file for an EIN. The Employer Identification Number (EIN) is a federal tax ID issued by the IRS.
Apart from being useful for taxation purposes, the federal tax ID is also relevant for several other functions, including getting a business bank account and building credit with vendors.
There is no filing fee for requesting an EIN. You can get one quickly if you file for it online.
In the event that online filing is not possible, you will have to download and fill Form SS4. This form is also relevant for people who don’t have an SSN, or if the LLC is owned by another business entity.
Form SS-4 can be filed via fax or postal mail. Choosing fax is the better option, as the processing time is a few business days. On the other hand, forms filed via postal mail can take a few weeks to process.
6. Annual Reports And State Franchise Tax For Delaware LLCs
Delaware doesn’t require LLCs to file annual reports. However, all LLCs in the state must file an Annual Franchise Tax of $300. The tax must be paid by June 1 of every calendar year, except for the year in which the LLC was formed.
For example, if your Delaware LLC is formed on April 11, 2021, the first State Franchise Tax is due before June 1, 2022. After this, the tax must be paid every subsequent year.
The state franchise tax has to be paid online and the payment can be completed using credit cards. When you file online, you will need the LLC’s 7 digit business entity file number. If you don’t have this number, you can search for your business name on the state entity database and check the file number.
In case of non-payment of the franchise tax, the state charges a late fee of $200. An additional penalty of an interest of 1.5% levied for every month the payment is delayed.
7. Taxes, Permits, And Business Licenses For Your LLC In Delaware
Apart from the Franchise Tax mentioned above, your LLC in Delaware may also have to consider additional licenses, permits, and taxes. Specific licenses and permits often depend on the city/county of the operation of your business and the specific industry of your LLC.
For example, depending on the industry of the LLC, you might need a building permit, sales tax license, home occupation permit, and more. City as well as state guidelines can play a part in these requirements.
All LLCs in Delaware need to get a business license from the Delaware Division of Revenue. The quickest way to achieve this is by using the Delaware One Stop Business Licensing and Registration Service.
The quickest way to achieve this is by registering with the Delaware One Stop Service online. As you register, you’ll have to answer several questions that determine the industry of the Delaware LLC and the business license fee.
You can also register for the business license via mail.
For federal taxation, the IRS usually considers LLCs as pass-through entities. However, this also depends on the way you structure your business. For pass-through entities, the income from the LLC can be reported along with your personal returns with the IRS. These requirements will change if you choose to have your LLC taxed as an S-corp or C-corp.
Careful planning goes a long way in ensuring that your LLC remains compliant with the requirements of various jurisdictions. It might be a good idea to hire a professional to handle the local, state, and federal taxation, permit, and licensing requirements. Taking the DIY route may not be the best course of action unless you’re well aware of all the requirements and expectations.
Why Delaware LLC?
Before you go ahead and create your LLC in Delaware, it is important to give it a good thought, especially if you don’t live in Delaware. The state has been hyped-up as a very popular business destination, so several people often recommend that you register your LLC in Delaware. But why Delaware LLC?
There are several advantages listed for having a DE LLC. These include strong liability protection, faster business dispute resolution in the courts, and a business-friendly tax structure.
Many of these are true at some level or the other. And these can substantially take off the headache involved in running a business. Therefore, forming an LLC in Delaware really can be quite advantageous.
Should You Form An LLC In Delaware?
While Delaware certainly has business-friendly laws and structuring, it should be remembered that it’s not a magic bullet. While huge corporations certainly can (and do) make the best of these laws, smaller businesses like LLCs might not have the same luck.
There are several misconceptions on various facets of running a business in Delaware, including taxation. The DE Secretary of State website itself has a section offering clarifications on these beliefs, whether facts or myths.
Delaware isn’t a tax haven, and you’ll have to pay taxes in the state you live in, even if DE doesn’t take its cut of the income. So, if you don’t live in DE and have formed an LLC there, you’ll have to register the LLC in your home state. For your home state, this will be registered as a ‘foreign LLC’, since it’s domestic to Delaware.
That will bring a whole lot of complexity to the mix. And you’ll still have to pay taxes, even if saving them was your original goal!
To sum up, if you live in Delaware, and intend to set up an LLC in the state, go ahead. If you live in another state and want to legitimately expand your business to DE, forming an LLC in the state is a good idea.
However, if you don’t live in DE and want to form a Delaware LLC just on the hype of tax savings, it’s best to think again. There’s a good chance you’ll be better off setting up the LLC in your home state, rather than making a complex business structure that might not come close to your expectations.