Follow our free guide to form an LLC in Delaware
- Pros and Cons of Forming an LLC in Delaware
- Starting Your Delaware LLC
- Maintaining Your Delaware LLC
- Additional Delaware Resources
Why is Delaware such a unique location to form your LLC? Read our comprehensive guide for pros, cons, tips to start the business, and how to maintain it.
Pros and Cons of Forming an LLC in Delaware
No State Sales Tax
Delaware is one of a few states in the nation that does not charge sales tax. Sales on cigarettes, alcohol, and gasoline are still taxed; however, the tax rate for these items is among the lowest in the U.S.
Privacy for Owners
Delaware does not require full disclosure of an LLC’s members in the incorporation paperwork. The business may select an organizer who is neither a member or manager to be listed on the paperwork that is filed with the Secretary of State.
No Annual Report for LLCs
Delaware does not require LLCs to file an annual report. This particular requirement, however, is still in place for corporations and non-profit organizations.
Expensive Process for Foreign LLCs
For business owners who choose to form an LLC in Delaware while living/operating in another state, the requirements and overall process can be complicated and expensive, starting with a mandatory $200 filing fee for Foreign Qualifications.
Most of Delaware's Laws Favor Large Corporations
Delaware’s favorable corporate/tax laws make it a popular home for many major corporations — 50% of publicly traded corporations and 60% of Fortune 500 companies in the U.S. But most of those laws are in place to service and protect bigger corporations; smaller companies, especially those not physically located in Delaware, may not see much the same benefits.
Cost of Doing Business
- $90 filing fee/ $200 foreign filing fee
- $300 Alternative Entity Tax
- No annual report due
Starting Your Delaware LLC
Starting an LLC in Delaware may seem difficult, but you will see that forming a business can be done in a few steps, especially when you have help. Here are the steps needed to ensure that your Delaware LLC comes together correctly:
- Step 1: Name your LLC
- Step 2: Establish Ownership of your LLC
- Step 3: Choose a Registered Agent
- Step 4: File the Certificate of Formation
- Step 5: Create your Operating Agreement
- Step 6: Register for an EIN
Step 1: Name Your Delaware LLC
Choosing a name for your new business is an important first step in forming your Delaware LLC. As you narrow down the list of possible company names, there are a few guidelines to keep in mind:
- The official name of your business must end with: Limited Liability Company, Limited Company, LLC, or L.L.C
- Your business name cannot be intentionally misleading to consumers
- The name of your new LLC must not be similar to another organization’s name/trademark
Depending on the state that you form your LLC in, a few restrictions may apply.
A few examples include:
- “Lottery” and “Bank” are ineligible for use (any state)
- Terms that represent educational or Veterans’ organizations are restricted
- Terms related to the Armed Forces or civil servants (police, EMT, fire)
Due to the growing importance of technology, creating an online presence is important in starting a business. Check if your domain name is available in online web hosting sites.
Step 2: Establish Ownership
The owners of an LLC are known as either members or managers. The title depends on the management structure of the business.
The LLC Management Structures:
- Member-managed: Ownership is divided among members of the LLC, and all parties receive profits according to an agreement (distribution of responsibilities, sharing liability, etc.)
- Manager-managed: One person is appointed as the main operator, and other LLC members such as investors are not actively involved in day-to-day operations.
Select a name and choose a management structure for your LLC. You also need to decide on the members of the LLC—unless you plan to operate as a sole proprietorship or a partnership.
The rules concerning LLC ownership in Delaware include:
Required Number of Members
Delaware LLCs must have at least one member or manager in order to form a business.
Member Disclosure Requirements
An organizer/authorized representative may sign and file the Certificate of Formation in place of the LLC members.
LLC members in Delaware may be of any age.
There are no residency restrictions imposed on LLC members in Delaware.
Step 3: Find a Registered Agent in Delaware
The registered agent is necessary for all LLCs formed in Delaware. Your business cannot be official without filling this position.
What is a registered agent?
A registered agent is a third-party who is responsible for handling service of process notices, communication with the Secretary of State, and other official government documents.
Why do you need a registered agent?
Whenever you start an LLC in Delaware, the law requires a person to consistently be available to receive government documents. The state must be able to contact the agent during standard business hours.
Who can be a registered agent in Delaware?
The requirements to be a registered agent are as follows:
- A resident with a physical address in Delaware
- An LLC or corporation that is licensed to conduct business in Delaware
It is also possible for you to be your own registered agent as long as you use a physical address.
Why you may not want to be your own registered agent
Contact information for a registered agent is public record. By choosing to be your own registered agent, LLC business owners risk compromising their personal information.
Tip: Avoid the hassles and choose Swyft Filings to fill the registered agent needs for small businesses in Delaware. Find more information here.
Step 4: File the Certificate of Formation
One of the most important steps involved in officially (and legally) forming an LLC in Delaware is filing the Certificate of Formation with the Secretary of State. This vital document includes the following:
- The name of the LLC
- The name and location of the registered agent
- The name(s) of the members or organizer filing the paperwork
Additional Delaware Filing Requirements — Foreign LLCs
If you plan to live and operate your business in another state, you can still form your LLC in Delaware, but you must register as a Foreign LLC.
A foreign LLC is any business that is “housed” in one state and incorporated in another. You can found and build a flower shop in Texas while your LLC is technically formed in Delaware.
Even though the state government allows (and even welcomes) this, it adds to the formation process with more paperwork and more expense.
Important Points to Consider:
- You must also form an LLC in the state where your business will operate
- You are still subject to the requirements (fees and taxes) of both states
Please Note: Conducting business in Delaware without filing as a Foreign LLC can result in a $200 fine.
Step 5: Create an LLC Operating Agreement
The LLC Operating Agreement, although not necessary for LLC filing, is a great way to organize leadership and have something to refer to.
What is an LLC Operating Agreement?
The LLC Operating Agreement is an in-house legal document that defines the rights and responsibilities of each person involved in the business and lays out the details involving how the business will operate.
Why do I need an LLC Operating Agreement?
In times of dispute or instability, the LLC Operating Agreement settles disagreements because it clearly defines the roles in the company. The LLC Operating Agreement often prevents agreements from happening because the concerns are already addressed.
What goes into an LLC Operating Agreement?
While there is not a set rule of what must be included in your LLC operating Agreement, most documents include the following the information:
- Designation of the members/managers
- Initial capital contributions of the members
- Member transfer/addition rules and restrictions
- Distribution of profits to the members
- Voting privileges and percentages for each member
Tip: Get a customized LLC Operating Agreement for your small business with Swyft Filings. Add structure to your LLC now.
Step 6: Obtain an EIN
The state of Delaware requires an EIN for any business that has/will have employees.
What is an EIN?
The EIN (Employer Identification Number) is also known as a Federal Tax ID and is a nine-digit number that is assigned to your business by the Internal Revenue Service (IRS). The EIN identifies your business with the government much like a personal Social Security number.
What business entities need an EIN?
The types of business entities that need an EIN include:
- An LLC with employees (even if owned by one person)
- An LLC with more than one member
- A partnership (LLC or C-corp)
Please Note: A sole proprietorship is the only business entity that is not required to have an EIN.
Why is an EIN necessary?
The IRS uses the EIN to identify the taxpayer. Additionally, most banks and financial institutions will ask for the EIN before opening any accounts.
The more common reasons you would need an EIN are:
- To open any U.S. bank account
- To hire employees
- To pay independent contractors
- To file taxes for your LLC
Please Note: If you collect revenue of any kind through a business entity, you will need an EIN.
Swyft Filings offers EIN services for small businesses in Delaware. Find more information here.
Maintaining Your Delaware LLC
The initial phase of setting up your Delaware LLC is complete and the next part of the process will further establish your LLC with the state and get you ready to do business.
The next phase of your LLC:
- Step 1: Register for the necessary taxes in Delaware
- Step 2: Apply for the required permits and licenses
- Step 3: Request a Certificate of Good Standing
Step 1: Register for Delaware State Taxes
All LLCs formed in Delaware must pay the annual Alternative Entity Tax — details are listed below:
Due Date: June 1
Late Fees: $200 late fine plus 1.5% interest per month
Other taxes your LLC may need to pay include:
- Gross Receipts Tax (from 0.1037% to 2.0736%)
- Employee Withholding Tax
- Unemployment Tax
Regardless of industry, all LLC members must pay state and federal income taxes on their earnings. The state income tax rate for Delaware ranges from 2.2% to 6.6%.
Step 2: Apply for Business Licenses and Permits
The licenses and permits required for an LLC in Delaware can vary, depending on a number of variables:
- Location (city and county)
- Type of Business
Tip: If you would like to see more in-depth information on licenses and permits, please feel free to visit the content in our learning library that covers business licenses and permits.
Step 3: Obtain a Certificate of Good Standing
Your Delaware LLC is officially ready for business, but there is still one last step — the Certificate of Good Standing.
Since many financial institutions and businesses require proof that your new business is fully compliant with the state, obtaining a Certificate of Good Standing provides your LLC with a “seal of approval” from the Secretary of State.
What is a Certificate of Good Standing?
The Certificate of Good Standing is an official notification from the government agency that confirms your entity has been properly filed and is still in compliance.
Why should I obtain a Certificate of Good Standing?
In the course of conducting business, there will be times when you will need to prove that your business is properly filed and fully compliant with the state. Many banks and businesses will request a Certificate of Good Standing as part of the due diligence process (especially during major transactions).
For the most part, any time you need to show your business is properly filed and fully compliant, you will likely need to present a Certificate of Good Standing.
Swyft Filings can create a Certificate of Good Standing for your Delaware LLC. Click here for more information.