If you’re starting on an entrepreneurial path and forming a limited liability company (LLC), you may have heard that certain states offer advantages to LLC owners. Delaware is often touted as one of the best states to form an LLC for a variety of reasons. However, this does not necessarily mean that it’s in your best interests to form an LLC in Delaware if your business is based in another state.
Here you’ll learn the benefits of forming an LLC in Delaware and what else you should consider.
What Is an LLC?
An LLC is a type of business entity that offers personal liability protection for its owners, who are called members of the LLC. An LLC also offers pass-through taxation, which means that the LLC itself is not taxed. Instead, the profits or losses pass through to the LLC members to be reported on Schedule C of their personal tax returns. An LLC can also choose to be taxed as a corporation if it’s deemed financially beneficial to do so.
An LLC also offers simplicity and management flexibility when compared to a corporation. Corporations are more complex to form and administer, and come with many requirements, such as the election of a board of directors. LLCs do not have such requirements and can essentially be managed any way that members choose.
Benefits of Forming an LLC in Delaware
Delaware is considered a favorable state to form an LLC for a variety of reasons.
Delaware does not have a sales tax and does not tax out of state income. That means that if you do business in other states, Delaware will not tax that income. Delaware does, however, have an annual franchise tax for LLCs in the amount of $300.
Forming an LLC in Delaware requires filing a Certificate of Formation Delaware for a limited liability company, and the cost is only $90. It’s a very simple form, making it easy to fill out and upload to the Delaware Business Services website. Delaware also has no annual reporting or fee requirement for LLCs, other than the annual franchise tax.
Delaware is often listed as the most, or one of the most, business-friendly states in the country. Delaware has what’s called the Court of Chancery system, which is a system designed specifically for business disputes, and enables quick resolution of such disputes.
Additionally, Delaware has the strongest liability protection for LLC members compared to all other states, reduced fiduciary responsibilities, and extremely pro-business laws in general. That’s why more than 60% of Fortune 500 companies are incorporated in Delaware, as well as more than half of the public traded companies in the U.S.
Delaware has a strong economy, boasting the 5th highest growth rate in the country over the five year period ending in 2022. It is also centrally located in the East Coast and offers access to a market of more than 120 million consumers within a 500-mile radius. It also provides easy access to cross-state transportation and has a low cost of living.
Its economy is diverse, led by industries including advanced materials, clean energy, life sciences, manufacturing, and professional services.
Delaware is also home to a highly educated and skilled workforce, ranked number two for the highest number of PhDs per capita. It also has a highly regarded public school system as well as the acclaimed University of Delaware and Delaware State University, which boasts a NASA university research center.
Other Favorable States for LLCs
A few other states also offer some advantages for LLCs.
Wyoming has no state or corporate income taxes, and no franchise taxes. It also has a relatively low LLC formation fee at $100.
Similarly, Nevada has no state income, corporate, or franchise taxes. It also has strong liability protection for members as well as privacy protection.
South Dakota has no state income tax or corporate tax, and its fees are reasonable.
North Carolina has favorable business laws, a low cost of doing business, and a highly educated workforce.
Of course, there’s a catch! While Delaware is, in fact, a great state to form an LLC, if you do so but you’re based in another state, you’ll still have to register as a foreign LLC in your base state. A foreign LLC is one that has some kind of business presence in a state where it was not formed.
By registering as a foreign LLC, you’ll have to follow all the regulations of your home state as well as in Delaware, and pay all the required fees and taxes. If you also do business in other states, you’ll have to register as a foreign LLC in all of those states.
Even if you don’t do business in your home state, and do all your business in Delaware, you’ll likely still have to register as a foreign LLC in your home state because you’re based there. States have different rules about what qualifies your business as a foreign LLC, but in general, you must register as a foreign LLC if:
- You have a physical presence in the state
- You employ people in the state
- You have business meetings in the state
- You have a business license or licenses in the state
So, the bottom line is that unless you plan to move to Delaware and do business there, forming your LLC in Delaware is likely not going to offer you any benefits. You should check with your business attorney to see if you’d gain any advantage by forming your LLC in Delaware, but you probably will not.
Delaware is consistently ranked as one of the best states to do business and to form an LLC. It offers a host of benefits for all types of businesses and is home to many large companies. However, unless you plan to move there to do business, it’s probably not your best bet. Most of the time, your home state is the best place to form your LLC. When in doubt, check with your attorney for advice.