Is your company in a high-risk for lawsuits? Do your investors and owners need more anonymity? If you answered yes, then, here are 9 benefits to why setting up an LLC in Delaware might be your best option.
If you answered no, then it might not be in your best interest.
Cons of Registering an LLC in Delaware
Before I share with you the benefits, I want to make sure you are aware of the cons against registering an LLC in Delaware.
- You'll have to register as a “foreign” LLC in your state.
- You'll pay extra for a registered agent to handle all correspondence.
- You'll pay $300 per year on top of any tax liabilities for your state.
- Department of Transportation in Delaware may decline registering of vehicles in their state if you're not a resident.
- Please consult with a CPA for advice regarding your business structure. This website is sharing education and not giving legal advice. Please consult with an attorney for legal advice. Please consult with a CPA for tax advice.
Pro's of Registering an LLC in Delaware
Forming an LLC in Delaware is Easy
To form an LLC in Delaware you will need to file a Certificate of Formation with the Delaware Department of State, which costs $90. You can apply by mail or in-person. The Certificate of Formation is the legal document that officially creates your Delaware Limited Liability Company.
Additionally, there are no meetings or voting requirements in Delaware.
Custom LLC Structure and Rules
The structure of your company and any rules you create for members of your company are contained in the LLC Operating Agreement. Members of the LLC draft up the terms and rules & can be tailored to accommodate specific needs. This is known as “freedom of contract”, which most recently held up in court here.
An LLC can be used to operate a business, or an LLC can be used to hold assets (such as real estate, vehicles, boats, or aircraft).
Personal Liability Protection Against Creditors
A limitation on the personal liability of the members of an LLC means that members are not held liable for repayment if an LLC fails and leaves behind debt. The most money a member of an LLC can lose is the dollar amount the member had invested in the LLC.
Delaware LLCs possess increased asset protection against creditors. This means that if a member of an LLC has a judgment filed against them, a creditor cannot acquire any portion of the LLC's assets.
This benefit protects everyone in the company.
Delaware Protects Both Personal & LLC Against Creditors
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. This is called a reverse shield protection which protects creditors from controlling or liquidating the assets of the LLC. The LLC setup in Delaware limits a creditor of any members to a “charging order”.
This order limits a creditor of a member to only a lien against the profits that actually distributed to that members until it's paid off. The order also says that the creditor does not have a right to vote, manage or liquidate the LLC in the interim. The creditor cannot take over the ownership interest.
This is a great protection to have to protect ALL members from ONE member.
Delaware Courts Resolve Disputes
Delaware is world-renowned for its efficient and professional court system, which is particularly prominent in the areas of corporate, business, and commercial law. For many experienced lawyers throughout the world, the principal reasons to recommend organizing in Delaware are the Delaware courts and the body of case law developed by those courts. They point, in particular, to the Court of Chancery.
This specialized court system enforces the rights, and the judges write opinions that are thought so highly of that they become the bedrock for corporate law nationwide.
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.
Members Decide Tax Status
LLC members can decide how the business income will be taxed by the IRS. One of the disadvantages of corporations is that the profits on c-corps can be taxed twice, once at the corporate level by way of a corporate income tax and again at the individual shareholder level if a dividend is declared.
These are the tax-status options:
- S-Corp: LLCs can choose this tax status (elective) if they qualify. Members pay the taxes due on their share of the income & the profit is divided up with shareholders and paid out through a distribution, which minimizes taxes.
- 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.
- C Corporation: This treatment is available for any LLC. C corporations complain about double taxation. The LLC pays its own tax at corporate tax rates, and members pay income tax on any distributions.
Personally, if you are a small business and you answered yes to the first two questions, I recommend the s-corp status. The profits pass through to the individual shareholders (or members) based on your LLC's rules. If you are raising money through venture capitalists, then you would setup as a c-corporation.
Angel Investors and Venture Capitalists Prefer Delaware Setup
Investors love the c-corporation status because it's easy to trade shares of their investment with an offering of preferred stock. On the flip side, it's difficult to sell or transfer shares in any LLC setup.
Investors also prefer the c-corporation setup because preferred stock allows the holder rights to higher dividends, vote more than once per share and convert to common stock upon certain events. On the flip side, s-corporations can only have 100 shareholders and cannot offer preferred stock.
Privacy for Members and Managers
When you form an LLC, some states require you to disclose the name and address of each member in the formation documents. That information becomes public record and is easy to find online (in most states).
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
- Check if your business name is available
That's another reason investors like the Delaware setup.
Save on These Taxes
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 corporate tax: you simply pay the yearly $300 fee for the franchise tax.
- No tax on intangible income, like royalties, making Delaware an excellent choice for holding companies that own intellectual property.
Disclaimer: Nothing on this website or this page shall be interpreted as legal advice or tax advice. Feel free to share your comments below, but please consult with a licensed professional if you have legal or tax questions.