If you’re reading this, it’s a pretty safe assumption that you’ve decided to form a Delaware LLC.
Congratulations! Any time you start a new business or open a business in a new state it’s a rush.
In this article, I’ll go over all of the steps needed to form an LLC in Delaware, but before I get into that I’m going to cover a few of the basics about what a Limited Liability Company (LLC) is and the advantages of choosing an LLC over other business models.
(If you want to skip to the ‘how to form an LLC’ section, click here)
Table of Contents
What Is A Delaware LLC?
A Delaware LLC is a Limited Liability Company formed in the state of Delaware that is governed by the laws, regulations and statutes of the state of Delaware.
Why choose An LLC?
There are three major advantages to forming an LLC instead of choosing a different business structure, like a sole trader, S or C corporation or a partnership.
1. Limited Liability And Asset Protection
The first advantage is quite possibly the most important. Owners of Delaware LLCs can’t be held personally responsible for the legal or financial problems or debts of the LLC.
If your company is sued or goes bankrupt, creditors of your Delaware LLC can’t come after your personal assets like your house, car or personal bank account. Their only financial recourse is to go after the finances and assets of the Delaware LLC, not yours.
We’ve all been recently acquainted with the notion that all it takes is one unexpected event (such as a worldwide viral pandemic) to topple even the most successful and prepared businesses, so any amount of protection is comforting. The protection of your personal assets is vital for anyone who values the hard work and effort they’ve put into their business.
Another of the advantages of forming an LLC in Delaware is as the owner of a Limited Liability Company (LLC), you can ensure that your personal information is kept safe and off the public record.
Unfortunately over the past decade or so, hackers and scam artists have become more adept at what they do. Now they can steal your identity and rack up thousands of dollars in debt in your name using small bits of your personal information that may seem inconsequential to you.
When you operate under business models such as partnerships or as a sole trader, you’ve got no choice but to register your personal information with the Delaware Secretary of State so that they can put it on their website. When you register your personal information with the Secretary of State and it’s put up on their website, it’s on public record and anyone can find it with a simple online search. This leaves your personal information vulnerable to hackers and scammers.
However, if you form a Delaware LLC instead, you can protect your personal information.
Keeping your information safe is fairly simple and all you have to do is use an LLC formation service. The LLC formation service will register their name and address with the Secretary of State, rather than yours and you still retain ownership of your Delaware LLC. This ensures that your information is safe and kept away from people who would use it with nefarious intent.
The last advantage of forming an LLC is Delaware LLCs enjoy considerable tax benefits that other business structures in the state don’t.
If you start a corporation instead of an LLC in Delaware, you’ll notice that you experience a phenomenon known as “double taxation”.
Here is why it’s called “double taxation”. All of the profits earned by the corporation are taxed at corporate rates. Then when the already-taxed profits of the corporation are divided up among corporation owners and shareholders, each of them has to pay personal income tax on these dividends as well.
This means that each of the corporation owners or shareholders is taxed twice, thus the term “double taxation”.
Owners of Delaware LLCs entirely avoid “double taxation”. All of the profits earned by your Limited Liability Company (LLC) are taxed at company rates, rather than corporate rates. Then the profits that are divided among LLC owners are considered personal income and charged a personal income tax. So by forming a Delaware LLC you can ensure that your profits are only taxed once.
The tax benefits for Delaware LLCs don’t stop there. In 2017, the Tax Cuts and Jobs Act was passed and it provides further tax benefits for LLCs called the Qualified Business Income Deduction (QBID). This affords LLCs a discount of up to 20% off their taxes- which is a benefit only allowed to LLCs and not any other business structure.
How To Start An LLC In Delaware
Now that you know what a Delaware LLC is and what the advantages of LLCs are, you can more confidently make the decision to form an LLC. If you’re sure that an LLC in Delaware is the right business structure for your company, then read on for the steps to form your Delaware LLC.
IMPORTANT: If you’re nervous about the LLC formation process and feel like you could use some help to navigate through all of the red tape associated with starting a Delaware LLC (which is a completely understandable feeling), as well as help to file all of the formation documents and keep your information off the public record, there are companies that do all of this for you.
They are called LLC formation services. They help you to start your LLC in Delaware and get it established, and they do it for as low as $0 plus state filing fees. (However, my most highly-rated and recommended LLC formation service is ZenBusiness. They charge $49 plus the filing fee.)
If you’d like a bit of guidance to get you through the business formation process, check out my guide about the best LLC services.
1. Obtain Certificate Of Formation Form
The Certificate of Formation is the only form that the Delaware Division of Corporations requires LLCs to file to form an LLC in Delaware. Obtaining this form is the first step in your LLC formation journey.
You can download and print out the Certificate of Formation here:
This is a PDF form that you can obtain online through the Delaware Division of Corporations website.
Since this is the primary form that Delaware LLCs need to file in order to form an LLC in the state, the remaining four steps will relate back to this form.
2. Choose Your Business Name
The next step on your journey to create your LLC is to create a name for your business entity.
This may sound easy but you can’t just choose the first business name that pops into your head, and you may not even be able to use the one you really want. You’ll need to make sure that no other Delaware business has the same name.
Every Delaware business is required to have a unique legal name according to the Secretary of State and the Delaware Division of Corporations, so you can’t use the same name that someone else has for their business.
How do you find out if another business entity has already used the name you want? Luckily, that’s fairly easy. You just go online and search the Secretary of State’s business name database, which you can access here.
If there are LLCs with the name you had originally chosen for your business, don’t worry too much about it because there are ways around that. You can tack words like “Limited Liability Company” “L.L.C.”, “LLC”, “Syndicate”, “Trust”, “Fund”, etc. to the end of your business name. This is much like adding letters to the end of an online screen name because someone had already taken the one you’d originally wanted.
If you don’t like your business’s registered LLC name, there are ways around that as well. You can file to get a trade name or DBA (Doing Business As), which is the name that your business presents to the world in its signs, advertisements, promotions and more. You can register for a trade name here.
3. Choose A Delaware Registered Agent
According to Delaware law, every LLC formed in Delaware or operating in Delaware must have a registered agent.
A registered agent is a legal term that refers to someone who is appointed to be a statutory agent. This person or service makes themselves available during business hours to receive official mail, documents and legal notices for your business from state offices like the Division of Corporations or the Court of Chancery.
You have two options when it comes to choosing a registered agent: you can either elect to take on the registered agent role yourself, or you can choose to use a Delaware registered agent service. It’s quite an important choice to make and I’ll tell you everything you need to know before you make the decision.
Of course, there are some downsides to becoming the registered agent for your business. You’ll need to register an address to be listed on the public record and since you aren’t a registered agent service and you’re assuming the role of registered agent, you’ll have to list your personal address. This leaves you vulnerable to attacks from hackers and scam artists.
There’s another factor that many people don’t consider when they choose to become a registered agent themselves: you’ll have to be available during business hours to accept mail, documents and legal notices for your business entity, while also running said business entity. It’s pretty likely that your business operates during the same business hours that the state offices do, and you can’t really be in two places at once. This puts you at risk of missing important notices, which means that you could be sued and not even be given the chance to defend yourself.
The only real upside to being a registered agent is that you don’t have to pay any fees.
Choosing a registered agent service means that your personal information will remain off the public record and is kept safe from hackers. The drawback is that these services typically cost between $99-$299 per year.
But when you stop to consider the fact that if you miss an important legal notice or document it could cost you your entire business and everything you work for, $99-$299 per year isn’t that bad. I advise all new LLCs to use a registered agent service.
If you’d like to keep your personal information, assets and business safe you can check out my guide about the best Delaware registered agent.
4. Choose Your LLC Address
Your registered agent’s name isn’t the only bit of information you have to provide on your Certificate of Formation form according to Delaware law. Business entities in Delaware are required to register an address for their business in Delaware that will be listed on the public record.
If you aren’t using a registered agent service and your business has a physical street address, you can either use that or your business’s mailing address. Barring that, you’ll have to list your home address on the public record.
If you do choose to use a registered agent service, one of the services they provide your business entity with is registering their name and address on the public record instead of listing your personal details.
5. Sign And File Your Certificate Of Formation Form:
Once you’ve filled in all of the necessary information and you’re confident that it’s all been entered correctly, you can file a Certificate of Formation form.
If you’re filling this out yourself instead of using an LLC formation service, you sign it yourself. If you use an LLC formation service, they sign it on your behalf and your information is kept safe.
You can either submit the form online using the Document Upload Service provided by the Division of Corporations, or you can mail it in along with the filing fee. You can submit it by mail to:
Division of Corporations
PO Box 898
Dover, DE 19903
Once the Division of Corporations has processed your Certificate of Formation, they’ll contact you via mail or email. This typically takes 1-3 weeks. Some LLC formation services offer expedited processing services if you’re inclined to get through the process quicker.
Other LLC Activities
Once you’ve formed your LLC there are a few activities you must partake in to remain in good standing with the Secretary of State and obey Delaware law. These activities aren’t part of the formation process, but they are still necessary to remain on the Division of Corporation’s good side and stay away from the Court of Chancery.
You’ll need to obtain and maintain a business license. Business entities doing business in Delaware must get a business license and they have to be renewed yearly. Many states require that LLCs file annual reports but Delaware doesn’t. Even though you won’t have to worry about annual report filing, LLCs are required to pay an annual franchise tax of $300.
If you’d like help with some of these filing duties, paying the yearly franchise tax and other crucial duties, you should consider a Delaware PEO company as well as some online legal services.
Delaware LLC Fee Summary
No matter whether you choose to go through the process of forming your LLC on your own or choose to hire an LLC formation service, there will be filing fees that you’ll have to pay. Here’s a quick guide to the sorts of filing and other fees you can expect when you form an LLC in Delaware:
Certificate of Formation fee: $90
Name Reservation fee: $75
Registered Agent Fee: $99-$299 per year
State Personal Income Tax: 2.2%-6.60%
State Corporate Income Tax: 8.7%
Franchise Tax: $300 per year
After Starting Your Delaware LLC
You’ve already completed one monumental step when you formed your LLC and congratulations are in order. So do something to relax and celebrate like drink a beer or a bottle of wine, go out on the town, have a fancy dinner or enjoy a small vacation. But don’t stay away too long because there are a few more things you need to do before your LLC will have the foundations it needs to function properly as a business.
Step 1. Create An Operating Agreement
If you were to consider your business as an animal, the LLC would be its shell or skin and the LLC Operating Agreement would be the nervous system that tells the creature what to do and how to do it.
An Operating Agreement is basically a contract between LLC members that provides a detailed explanation of how the business will run. The Operating Agreement should identify each member and then go on to outline the structural, operational, managerial, and financial aspects of your business.
A good LLC Operating Agreement should clearly describe the ownership percentages of LLC members as well as which members should make high-level decisions. LLC Operating Agreements should outline the roles of each member and the relationships between members. It’s also important that your Operating Agreement clearly defines the ownership percentages of each member, as well as the shares of profits and losses of each member.
Additionally, Operating Agreements should describe what happens when a member leaves or if a new member joins the business. If you use this model, your Operating Agreement won’t just provide information about how to run your business but also about what to do if there is a disagreement between LLC members.
As is probably obvious by now, the Operating Agreement is absolutely CRUCIAL to the successful operation of your business. Each of the items detailed in your Operating Agreement defines how your business is run. LLCs have to operate under the instructions laid out in the Operating Agreement, so if you get it wrong your business could be stifled and there won’t be any room for innovation or adaptation and your LLC members may not be properly compensated due to the faulty decision-making and poor structures outlined in your agreement. If you get it right, your business will grow and flourish without the constraints of a faulty agreement.
If you’re concerned about getting the Operating Agreement right in order to maintain business success and define the roles and compensation of your LLC members (which is a legitimate concern), there are lots of LLC formation services in Delaware that will draft and file your Operating Agreement on your behalf.
Northwest Registered Agent also provide a free operating agreement template on their website. You can get it here: Free Operating Agreement Template
Step 2. Apply For An Employer Identification Number
You’ll need to apply for an Employer Identification Number (EIN) if you plan to hire employees or open a business bank account. An EIN also allows you to apply for certain permits and licenses as well as handle employee payroll. Of course, you don’t have to hire employees in order to obtain an Employer Identification Number- it’s just a business identification number for LLCs.
An EIN identifies LLCs much like a Social Security Number is used to identify individual people. It’s fairly simple to apply for an Employer Identification Number and you can do so through the Internal Revenue Service (IRS).
Many LLC formation services in the state will apply for an EIN on your behalf, which alleviates a lot of the guesswork when it comes to filing for an EIN.
Of course, you can also file for an Employer Identification Number yourself. You just have to go to the IRS website and submit your application between 7AM and 10PM Monday-Friday.
Step 3. Open A Business Bank Account
There’s one more step you need to complete before you dive headfirst into the craziness that is running a business in Delaware (or anywhere else, really), and that’s to open a bank account specifically for your company.
A lot of people overlook this step when they form a Delaware LLC, but it’s important.
Many people choose to conduct both business and personal transactions through their personal bank accounts and then try to decipher which transactions were business transactions later when tax season rolls around. It may seem like it’s easier to use your personal account for business transactions, but there are two important reasons you shouldn’t even consider it.
First of all, you’ll be able to easily determine that every transaction is a business transaction if it’s made on the business account. You may think it will be easy to tell the difference between personal and business transactions, but at the end of the year (which is often several months after the transaction was made) it’s pretty unlikely that you’ll be able to remember which were which for tax purposes. This makes filing taxes a lot more complicated than it actually needs to be.
Secondly, if you conduct business transactions through your personal account it leaves you vulnerable to personal lawsuits regardless of the personal detail protection that you typically enjoy when you form an LLC.
If you value the safety of your personal information and don’t like the thought of unnecessary headaches when it comes time to file your taxes just open a business bank account when you form your LLC.
You’ll typically need a bank kit in order to open a business bank account for your LLC. This includes certified copies of things like your Certificate of Formation, your EIN and your Articles of Organization.
Most LLC formation services include bank kit creation as part of their formation services, which can save you some of the hassles of rounding up the paperwork yourself.
The decision to form a Delaware LLC is an important decision and a big step to complete on your business journey. Congratulations on making the decision to take control of your business destiny!
If you choose to forego LLC formation services (which start as low as $0 plus state fees), there are five steps you need to follow in order to form your LLC yourself:
- Obtain the Certificate of Formation form
- Name your LLC
- Choose your Registered Agent
- Choose your LLC address
- Sign and file your Articles of Organization
It can be infuriatingly complicated to wade through the red tape and jargon associated with forming an LLC at times. However, forming an LLC on your own without an LLC formation service to hold your hand and guide you through the process can leave you with an invigorating, rewarding feeling.
Congratulations again on your decision to form an LLC in Delaware, and I wish you the best of luck on your business journey!