When establishing a new business, the initial decision process can make us overwhelmed when it comes down to the proper foundation for a successful future. A few of these decisions might include; when and where in the US show I incorporate? Which taxation structure is best for us? Which entity aligns best with your business goals?
Limited liability companies, popularly known as LLCs, have become the most popular format in the world of business entities. The LLC format is a considered a hybrid of corporations and general partnerships. Such format has quickly become the business entity of choice for millions of American businesses, especially with international investors.
Although LLCs can be established in every state in the US, recently numerous entrepreneurs and investors began to form LLC’s in Delaware. In this article, we briefly explain benefits and disadvantages of forming an LLC in Delaware.
Benefits of Delaware LLC
- State statutes keep Delaware at the cutting edge of business law.
Delaware is known to have the most business-friendly laws in the country due to the state’s statutes such as “Delaware General Corporation Law” and “Limited Liability Company Act” which are the foundation for those laws and beneficial to operating an LLC.
- The Court’s in Delaware have ability to resolve business disputes with efficient expertise.
In Delaware, the Court of Chancery hears all lawsuits involving the state’s business entity statutes. Unlike other states, the cases before this court are decided by judges specializing in this area of law and not juries. Being the judges in this court are known throughout the world for their great expertise and their ability to expedite the cases, makes LLC in Delaware very attractive for the business world.
- Delaware LLCs provide liability protection for owners.
As a benefit of LLC’s around the US, the most appealing advantages of a properly formed LLC is the liability protection it offers owners. When a business is structured as a properly formed LLC and a judgement is claimed against such LLC, in the case someone wins a judgement against your LLC, the liabilities are enforced against the LLC’s property, not the owner’s personal property.
The additional benefit offered in Delaware is that it takes this protection further by protecting the LLC from its members’ creditors as well.
- Delaware LLCs offer a flexible management structure.
As LLC’s are regulated by state laws, a Delaware LLC allows its members to decide if they manage the LLC for themselves, or if they prefer to appoint managers to do it for them. Regardless of their choice, Delaware law offers them flexibility in defining the powers and duties of their management team, which is not the same regulations as other states.
- Privacy to form an LLC in Delaware.
Similar to the structure stated earlier, the requirements to form a Delaware LLC allows privacy for the members and owners of an LLC by not mandating disclosure of the name and address of the members or managers in the formation documents as other states require. Instead, the state only requires public disclosure of the LLC’s name and registered agent.
- Delaware allows businesses to form series LLCs
Simply put, this would allow multiple branches of the LLC build into it. This structure would provide several advantages, such as, but not limited to:
- Each series having different members from the others, fantastic for growing a business with multiple partners or investors
- The property owned by one series is protected from the liabilities of every other series, great for business expansion.
- Taxation benefits with a Delaware LLC
As far as Federal taxation benefits, there are no specific benefits versus other states due to those being Federal regulations, and all states get to benefit when one is available. However, there are three major taxation benefits 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.
Disadvantages of Delaware LLC
After discussing most of the benefits an LLC formed in the state of Delaware can offer, we also would like to point out there are a few disadvantages of such benefits as well. I would like to clarify that there are not necessarily disadvantages, but yet lack of planning for operations to form an LLC in Delaware. If not planned and studied correctly, the disadvantages of forming an LLC in Delaware may far outweigh any “advantages” you may have heard of. Listed below is a list of disadvantages a Delaware LLC may cause.
- Operations of a Delaware LLC transacting in another State.
While being registered in a state and conducting business operations in a different state, the laws require that you register to transact business as a foreign corporation in that other state. For example, should your LLC be registered in Delaware and your office for providing consulting services is in New York, you will need to register to conduct business in NY and comply with their state regulations for business conducted in NY. The same goes for a store. Should you have a branch opened in CA, business conducted from that location will need to comply with CA regulations and also be reported in DE.
- Tax Implications of a Delaware LLC operating in another State.
In addition to the implications stated above as far as registration goes, such scenarios will also need to comply with state taxation requirement of state operations done in that territory. With that said, please note that benefits that the state of DE offers, does not necessarily apply.
In summary, unless operations are done in DE or if a tax planning strategy exists behind establishing a business in Delaware, we recommend new businesses and particularly small businesses to organize an LLC in their home state to avoid tax traps. However, an LLC in Delaware can be beneficial for Estate and Foreign National’s planning.
If you’re in the process of starting a business, we hope this article was helpful and clarified any questions you may have. Should you have any further questions or concerns on this topic, please feel free to contact us.