Should I Form an LLC in Delaware? The Pros & Cons
Many businesses form an LLC in another state to take advantage of the laws there. One of the most popular states to form an LLC in is Delaware. But why is this, and what are the real pros and cons?
If you’re new to the world of business, you may be surprised to learn that not all businesses incorporate in the state the owners live in. Many businesses form an LLC in another state to take advantage of the laws there. One of the most popular states to form an LLC in is Delaware. But why is this, and what are the real pros and cons of doing so?
What are the advantages of forming an LLC in Delaware?
· Business-Friendly Laws: Delaware is well known for having some of the most business-friendly laws in the US. Their state statutes, such as the Delaware General Corporation Law and the Limited Liability Company Act, are kept up-to-date in consultation with top corporate lawyers. These laws are often studied by business students and modeled by other states.
· Their Courts are Efficient & Knowledgeable: The Court of Chancery in Delaware hears all cases involving Delaware business entities, and the judges in this court specialize in corporate law. They are well known for their expertise in business matters and ability to come to a decision quickly, which means you won’t have to spend huge amounts on legal defense should you face a lawsuit (and vice versa).
· Protection for Your LLC: We often only consider how the business getting into financial difficulty can affect the members (owners), but what if one of the members gets into financial difficulty? Delaware has taken this possibility into account and LLCs formed in Delaware have protection from any member’s creditors, which means the business will be protected should someone’s personal financial situation go south.
· They Offer Tax Advantages: You don’t have to pay income tax in Delaware if you don’t do business within the state, and the same goes for sales tax. You also don’t have to pay tax on intangible income, which is any income that comes from intellectual property (such as books, film rights, etc).
· You Don’t Have to Make Your Name Public Record: Many states and countries around the world make it a requirement that you must share your name and address of members of an LLC, which are made public record. Understandably, few people like this aspect of business, since it risks their privacy and potentially safety, too. Delaware does not make this a requirement, the LLC certificate only needs to include the name of the LLC and the name and address of the registered agent.
· You Can Form “Series LLCs”: Delaware allows businesses to form an LLC with other LLCs built into it. You can think of this as a parent company with other companies underneath it. Each series can have different members and the liabilities are entirely separate.
· Venture Capitalists & Angel Investors Prefer Delaware: Many angel investors and venture capitalists require businesses they invest in to incorporate in Delaware. Though you should note that many investors require businesses they invest in to be formed as a corporation.
· You Can File Quickly: Nowadays, filing is fast in most states, however, Delaware generally has it down to under an hour.
What are the disadvantages of forming an LLC in Delaware?
· You Must Pay a Yearly LLC Tax: This is the case in most states, but the fee is $300 in Delaware. Make sure you compare this with the fees in your home state.
· Dual Registration: If you don’t live and operate in Delaware, you’ll have to also register in your home state, which means you have to do everything twice. You won’t have to pay tax there, but you will still have to pay filing fees in both states. This is a major drawback for small businesses with limited time and resources.
· You’ll Have to Maintain a Registered Agent: To have an LLC in Delaware, you have to have a “registered agent” there, which will likely be the company you paid to form your LLC there, though you may pay another agent or a contact you have there.
· You Can Be Subject to Additional Costs: Operating in another state gets complicated quickly, because you may incur additional costs in managing your business in both places. If you file or are subject of a lawsuit, you may have to pay for legal representation in Delaware and your home state.
· Series LLCs are Unique to Delaware: Delaware is one of the only states that accepts series LLCs, and most other states don’t accept it yet. The business structure has yet to face a legal test and so you may find that other courts in other states don’t respect the separated assets and liabilities, which may get you into serious trouble.
· You May Accidentally Get Into Legal Trouble: When you operate your business in two places, as someone new to business, it’s easy to make mistakes and potentially operate illegally within the state you call home. If you form your LLC in Delaware, you need to register your LLC as a “foreign” LLC in your home state. If you don’t do this and the state finds out, you’ll get a citation, even if you were ignorant of the requirements.
· The Tax Advantages Rarely Benefit SMBs: One of the reasons investors are interested in Delaware are due to the tax benefits there, but you can rarely reap the benefits of these as a small or even medium business (remember, small businesses are defined as having annual revenue of less than $21.5 million and less than 1,500 employees!). You’ve got to remember that you pay taxes where you make money, not where you register, so if you make your money in your home state, you have to abide by those taxes.
Note that if you live and operate in Delaware, there aren’t any downsides to forming your LLC in Delaware.
Should I form my LLC in Delaware?
If you’re still on the fence about whether or not you should form your LLC in Delaware, answer these questions:
· Am I willing to do the extra administration work, or pay for someone to do it for me? You will have to file reports in both states if you aren’t living and operating in Delaware, which makes for a lot of paperwork and deadlines, even if you don’t have to pay taxes in Delaware.
· Am I prepared to pay two sets of fees each year? You’ll likely have to pay filing fees in both states. This is usually about $90 in Delaware.
· Will I benefit from the Delaware laws? Before you form your LLC in Delaware to take advantage of their laws, consider whether you will likely need them or not. There are a lot of administrative disadvantages to being registered in two states, and if you don’t believe you’ll need to benefit from their court system, the other benefits may not be worth it.
· Do I want to attract investors? If so, Delaware may be the state to incorporate in –however, make sure that the investors you want to attract are willing to look at LLCs, and aren’t solely interested in corporations.
Are things different if I run an online business?
Not if you reside within a US state, no. Your online business will be taxed where you are, so if you live in Louisiana, you’ll pay taxes there, even if you register your business in Delaware.
In most cases, forming an LLC in Delaware when you do not reside within the state is just a headache – it is beneficial for global corporations, but for the average new business owner starting with 1– 10 employees, an LLC formed in your home state will be the best way to go and will ensure you don’t overpay in fees for little-to-no benefit.
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