Essential LLC Formation Documents for Delaware

Written by Wesley Henderson

December 24, 2020

woman working at home

The limited liability company (LLC) occupies a favored space in American business life because it is flexible and offers liability protection. The actual filing of the LLC in Delaware is straightforward. But, to do this properly, you should consider the pros and cons of using a Delaware LLC. It’s important to consider these things early because money and time must be set aside to handle legal requirements. 

LLC Formation Documents for Delaware. 

 

The single essential formation document for Delaware is the Certificate of Formation of a Limited Liability Company

1. Choosing the Right Name

Of course, there is more to it than just pushing the button to file to do so properly. First, you should research your name with the USPTO. Once you verify that your business name is available on the USPTO. You should broaden your search to make sure it is available with the correct domain, social media accounts, and so on. 

2. File the LLC

Next, you should file the LLC. Setting up the actual LLC is a matter of filing articles of organization with the state. Each state is different, but Delaware is the same as most – fill out a short form. In each state a fee must be paid as well. As we’ll discuss, most businesses should file where they are, not in Delaware. One early decision is who will serve as the registered agent. The registered agent is the person who will receive the company “mail.” Tax and legal notices will go to the registered agent, as well as less pressing junk mail. 

3. Operating Agreement

After that, you should turn your attention to the Operating Agreement. If you are a single-member, be sure you get an agreement showing that you own 100%. You don’t need to obsess over the details since you are the only one that is in control. If you have a business partner, then you need to give this some serious consideration. You can use our workbook that supplements our operating agreement or hire an attorney. Avoid a generic operating agreement if you have multiple members. 

4. Tax and License Compliance

Here, you should contact an accountant more often than not but the considerations are whether you need an EIN. Also, should you file for an S Election. You will also need to get a plan for your business license. 

Pros and Cons of Filing an LLC in Delaware

Many people want to start a Delaware LLC who are out of state. This conversation is directed mostly at those people. For Delawareans that want to start an LLC, you should use Delaware, of course. For those out of state, the conventional wisdom has always seemed to lean towards Delaware but make sure it is necessary for you to do so and you are not just adding additional problems for yourself instead of using home state’s LLC. 

Pros:

1. Respected Legal System

The Court of Chancery in Delaware specializes in corporate issues by using judges familiar with complex business issues to reduce the risk of unfair outcomes decided by juries.

2. Flexibility of structure

Delaware doesn’t require your directors, officers, or shareholders to be residences of Delaware when incorporating your business, but you are required to have a registered agent with a Delaware address.

3. Investor Interest

Most venture capitalists and angels looking to invest in a new company prefer those that have incorporated in Delaware because of advantages that are offered by this registration when compared to the other states.

4. Tax advantages

Once an LLC is formed in Delaware, if you do not conduct any business in the state over the course of the year, then you do not pay a corporate income tax. 

5. Shareholder tax advantages.

Any stock shares that are owned by individuals outside of the state are not subject to Delaware’s taxes. Non-residents do not pay a personal income tax either.

6. Filing speeds for tax reporting.

In Delaware, a tax filing for an LLC can be guaranteed to be processed in less than an hour, allowing the corporation to move forward with other business matters. 

Cons:

1. Dual-registration for out-of-state LLCs.

After registering in Delaware. you would also be required to register in the state of your business’ operations. That means you’d be forced to create two reports each year on the status of your business. There would be two state tax returns to file. You’d also be required to pay for two sets of filing fees to incorporate and renew over each period.

2. Delaware Taxes

Often Delaware is noted for being a “tax-friendly” state, but when your entire business is operated in your home state, then you will not be subject to the tax laws of Delaware but to the laws of where the transactions took place.

3. Registered Agent.

If your LLC is based in a state outside of Delaware, then you’ll be required to maintain a registered agent in that state. You would also be required to maintain a registered agent within Delaware to maintain the dual registration. 

4. Complicates your litigation.

You will be subject to laws of multiple jurisdictions, which requires additional research and planning that would be cost prohibitive to most small businesses.

You will have to decide on your own whether it is worth filing an LLC in Delaware. I would encourage you to be intentional about this and not just do it because you heard it was a good idea. Make sure that it makes sense and is worth the added effort. In my experience, more often than not, businesses are served by their home state just as well as using Delaware plus they get the added benefit of not having to keep up with two states. 

Additionally, you should consider that you will have to register your Delaware LLC in your home state, pay for a registered agent, pay for annual reports in two states, have tax liabilities in two states, and deal with any other maintenance issues from having two LLCs. All of these issues will essentially arise based on Delaware’s advertisement of being a business safe haven with well developed law.

Wesley Henderson

Hi, I'm Wesley! A business attorney turned entrepreneur devoted to simplifying how you protect your business and your assets. Like you, I'm an business owner so I get it and I started Drafted Legal to help you put in place simple and sound legal strategies so you can focus on your business and not worry about getting lost in legal nuances.

Products
Categories
Recent Posts

You May Also Like…

Legal Tips for Podcasters
Legal Tips for Podcasters

Previously known as “audio blogs.” Podcasts have quickly become this generation’s version of radio shows. Since Apple...

Drafted Legal Templates

Business
Law
101
Course

Start Your LLC