Should I start a Delaware LLC?
When starting a business, there are some initial decisions that are key to helping create a foundation for a successful future. Among the most important: should you incorporate? Which state should you incorporate in? And which entity aligns best with your business goals?
Limited liability companies—or LLCs—are relatively new to the world of business entities. Designed as a hybrid of corporations and general partnerships, they’ve quickly become the business entity of choice for millions of American businesses.
LLCs can be formed in every state in the nation, yet many entrepreneurs decide to form an LLC in Delaware, even though they never intend to operate there. In this article, we explain eight benefits to forming a Delaware LLC.
Why do business owners prefer Delaware LLCs?
1. State statutes keep Delaware at the cutting edge of business law.
Delaware is home to some of the most business-friendly laws in the country. The state’s statutes—like the Delaware General Corporation Law and the Limited Liability Company Act—are the foundation for those laws. These statutes are regularly updated in consultation with practicing corporate lawyers to ensure that Delaware is at the forefront of business-law developments.
Delaware’s statutes are often used as a model for other states when drafting their own corporate laws. Law students, lawyers, and judges throughout the United States study Delaware’s business entity laws when learning their own state’s laws.
Did you know? We’re particularly proud of this aspect of Delaware law. One of our founders, Josiah Marvel, was a prominent Delaware lawyer at the turn of the 20th century. Marvel played a significant role in drafting the Delaware General Corporation Law in 1899, helping to catapult the state to its current status as America’s corporate capital.
2. The Delaware courts resolve business disputes with efficient expertise.
In Delaware, the Court of Chancery hears all lawsuits involving the state’s business entity statutes. Cases before this court are decided by judges specializing in this area of law, not juries. These judges are known throughout the world for their expertise and the speed with which they resolve litigants’ disputes.
3. A well-developed body of case law provides legal certainty for business owners.
The Court of Chancery decides more than 1,000 civil lawsuits every year, many of which concern Delaware’s business laws. It should come as no surprise, then, that the case law on that subject is well-developed in the state. This enables Delaware corporations and other entities to better plan for the future.
4. Delaware LLCs provide liability protection for owners.
One of the most appealing advantages of a properly formed LLC is the liability protection it offers business owners. When you own a business structured as a properly formed LLC, even if someone wins a judgment against your LLC, the liabilities are enforced against the LLC’s property, not your personal property.
Delaware takes this protection one step further by protecting the LLC from its members’ creditors.
5. Delaware and federal tax laws provide flexibility and other benefits for LLCs.
LLC members can choose how the LLC’s income will be taxed by the IRS. The available options are:
- Disregarded: Single-member LLCs are taxed this way by default. The sole member pays income and self-employment taxes on the net business income, just like a sole proprietor.
- Partnership: This is the default treatment for multi-member LLCs. The LLC reports its income to the IRS, but the individual members themselves pay the income and self-employment taxes due on their share of the income.
- S Corporation: Single- or multi-member LLCs can choose this tax treatment if they qualify. This one works like the partnership tax treatment, but offers greater flexibility to minimize taxes.
- C Corporation: This treatment is available for any LLC. C Corporations involve double taxation—the LLC pays its own tax at corporate tax rates, and members pay income tax on any distributions.
What about Delaware state tax? It offers three big advantages for out-of-state businesses organized as Delaware LLCs:
- No income tax if the LLC doesn’t do business in Delaware, though LLCs must pay $300 annually for the Delaware LLC franchise tax.
- No sales tax if the LLC doesn’t do business in the state.
- No tax on intangible income, like trademark royalties, making Delaware an excellent choice for holding companies that own intellectual property.
6. Delaware LLCs offer a flexible management structure. Delaware LLC members can decide to manage the LLC for themselves, or they can appoint managers to do it for them. Whatever they choose, Delaware law offers them flexibility in defining the powers and duties of their management team.
7. You don’t have to sacrifice your privacy to form an LLC in Delaware. When you form an LLC, some states require you to disclose the name and address of the members or managers in the formation documents. That information becomes a public record, making it easier for anyone to find out what you own.
But Delaware doesn’t require the name and address of the members or managers to be listed in the certificate of formation. In Delaware, an LLC certificate of formation only needs to provide:
- The name of the LLC
- The name and address of the Delaware registered agent
You can see for yourself how that information appears to the public by conducting a Delaware LLC search at the Delaware Secretary of State’s website.
8. Delaware allows businesses to form series LLCs.
A series LLC is like one LLC with multiple miniature LLCs (called “series”) built into it. It provides several advantages:
- Each series can have different members from the others.
- The property owned by one series is protected from the liabilities of every other series.
Choosing to form a Delaware LLC offers considerable advantages that you should weigh when deciding whether, where, and how to incorporate. Delaware law and its court system provide a generally business-friendly legal climate, and numerous attributes of LLCs in the state combine to make it an excellent choice for any business owner. If you’re in the process of starting a business, we hope this post has helped you think about some of the important questions you’ll be answering soon.
Ready to start a Delaware LLC?
Make it happen with incorporate.com. From formations to ongoing business filings, we help you stay on track as your business grows. We specialize in a range of business services, such as:
- Forming an LLC or corporation
- Registered Agent service
- Obtaining an Employer Identification Number (EIN)
- Annual Reports
- Business License Research
- DBA “Doing Business As” Name
- Operating Agreements
- Certified copies of LLC or corporation documents