For businesses seeking a favourable climate for incorporation, Delaware is a top choice. It's not a coincidence that over 66% of Fortune 500 companies are incorporated in this state: Delaware's flexible corporate laws, specialised business court, and emphasis on privacy are just a few important draws for businesses.

But the journey to incorporation involves more than just choosing the state where you want to incorporate. Incorporating in Delaware requires a deep understanding of the steps and procedures involved in forming an LLC. With this knowledge, businesses can harness Delaware's business-friendly environment effectively while ensuring compliance with all legal requirements. With nearly 1,400 corporations forming in Delaware each week, understanding this process is an essential tool for any discerning businessperson.

By forming an LLC in Delaware, businesses can not only reap the benefits of a state that prioritises their needs, but they can also ensure they're on solid legal footing from the start. A Delaware LLC is a limited liability company formed under Delaware law, which governs its legal structure and compliance requirements. Forming an LLC in Delaware can be a strategic step in your business journey – one that requires the right approach and understanding.

What's in this article?

• What is an LLC?
  
• Benefits of forming an LLC in Delaware
  
• How to form an LLC in Delaware
  
• How Stripe Atlas can help
  

What is an LLC?

An LLC, or limited liability company, is a specific type of business structure that combines characteristics of both a corporation and a partnership or sole proprietorship. LLCs provide its owners (also known as members) with limited liability, similar to what shareholders of a corporation enjoy, while allowing for flexibility in management and taxation.

Key features of an LLC include:

• Limited liability: Like corporations, an LLC shields its members from personal liability for business debts and claims. This means if the business can't pay a creditor, the creditor cannot pursue the personal assets (such as a bank account, house, or car) of the LLC's members.

• Flexible taxation: Unlike corporations – which must pay corporate taxes on their profits – an LLC can elect to be taxed as a sole proprietorship, partnership, C corporation, or S corporation, which can result in significant tax savings.

• Management flexibility: An LLC has two choices for management: it can be managed by its members (member-managed) or by managers designated by the members (manager-managed). This is not the case with corporations, which have a fixed management structure including a board of directors and officers.

• Fewer formalities: Corporations are required to hold regular meetings with the board of directors and shareholders, maintain written corporate minutes, and file annual reports with the state. Members of an LLC do not need to hold regular meetings, which reduces complexity and paperwork.

• Pass-through taxation: By default, LLCs are treated as pass-through tax entities, meaning the income of the LLC is passed through to the members, who report this on their individual tax returns. The LLC itself does not pay federal income taxes, though some states do impose an annual tax on LLCs.

Benefits of forming an LLC in Delaware

Delaware is often considered an attractive state for incorporation (including creating an LLC), due to its advanced and flexible business laws, business-friendly environment, and Court of Chancery, a court that specifically handles business disputes.

Here are some of the key benefits of setting up an LLC in Delaware:

• Flexible business laws: Delaware has relatively flexible business laws compared to other US states. It permits single-member LLCs, gives owners strong decision-making control, and allows for "series LLCs" – separate legal entities with different members and managers operating under a single LLC.

• Specialised business court: The Delaware Court of Chancery specialises in business litigation and is known for handling complex corporate disputes efficiently. Its judges are appointed for their expertise in corporate law, which leads to faster, more predictable outcomes than general jurisdiction courts in many other states.

• Privacy protections: Delaware does not require LLC members' or managers' names in formation documents – only the registered agent's name and contact information are made public. This gives business owners some privacy.

• No state income tax for out-of-state entities: If you form your LLC in Delaware but don't conduct business there, you don't pay Delaware income tax. Delaware does charge an annual franchise tax, though it's generally minimal for small businesses.

• Investor and venture capitalist preference: Many investors and venture capitalists prefer – or require – companies to be incorporated in Delaware before providing funding. Forming your LLC in Delaware can make your business more appealing to potential investors.

• Ease of business operations: Delaware allows LLCs to form for any lawful purpose except banking and gives members broad latitude in structuring management. Owners can shape their own operational processes through the company's operating agreement.

• Ability to incorporate remotely: Delaware allows non-residents to register a business in the state, so individuals and entities from anywhere in the world can take advantage of its business-friendly environment. Non-US residents can form a Delaware LLC without being physically present, though steps like obtaining an employer identification number (EIN) or opening a US bank account may require additional documentation.

While Delaware offers businesses many benefits, these advantages might not be relevant to all businesses. Businesses also need to comply with tax laws and potentially register as a foreign entity in the states in which they operate. There are many details and nuances to consider, and it's a good idea to consult a business lawyer or accountant to understand all the implications for your business.

How to form an LLC in Delaware

Forming an LLC in Delaware involves a series of steps that ensure the legal and operational structure of your new business entity follows state and federal laws. Here's a guide for setting up an LLC in Delaware:

1. Choose a name for your LLC: Decide on a name for your LLC. The name should be distinguishable from the names of other business entities already on file with the Delaware Division of Corporations. Additionally, the name must end with "Limited Liability Company" or one of its abbreviations: LLC or L.L.C.

2. Designate a registered agent: Delaware law requires that each LLC has a registered agent in Delaware. A registered agent is a person or business that agrees to send and receive legal papers on behalf of your LLC. The agent must have a physical street address in Delaware (PO Boxes are not acceptable), and they must be available at that address during normal business hours.

3. File the certificate of formation: To officially create an LLC in Delaware, you must file a certificate of formation with the Delaware Division of Corporations, the state agency responsible for processing LLC filings and maintaining business records. This document includes basic information about your business, including its name and the name and address of your registered agent. Note that member or manager information is not required.

4. Create an operating agreement: While not legally required in Delaware, an operating agreement is strongly recommended to define ownership, management, and dispute resolution.

5. Obtain an EIN from the IRS: Most LLCs are required to obtain an EIN from the IRS, which is used to identify your business for tax purposes. Even if you don't plan to have employees, most LLCs are still required to obtain an EIN.

6. Fulfil other tax and regulatory requirements: Depending on the nature of your business and where you'll be operating, you may need to register for state and local taxes, which could include sales tax, unemployment insurance tax, and other state and local business taxes. Additionally, certain types of businesses require special licences and permits to operate legally.

7. File an annual report and pay ongoing costs: Delaware requires LLCs to pay an annual franchise tax of US$300 and file an annual report. The report and the payment are due by 1 June of each year. Delaware LLCs that use a registered agent service will also need to pay recurring fees for this service. Fees vary by provider but often run between US$50 to US$300 per year. If a Delaware LLC also operates in other states, it might be subject to additional taxes in those states.

8. Register as a foreign entity in other states (if applicable): If you formed your LLC in Delaware but plan to do business in other states, you may need to register your LLC as a foreign entity in those states. A Delaware LLC can be a good option for small online businesses, but physical small businesses that primarily operate in another state might be subject to additional registration and tax requirements.

Whether you're a first-time entrepreneur or an established business owner looking to create a new LLC, understanding these steps can simplify the process and guide your decision-making.
Additionally, the legal and tax implications related to setting up and running an LLC can be complex. Consider consulting with a legal professional or accountant who can help you navigate the legal landscape and set up your LLC correctly, by providing you with insights tailored to your unique circumstances.

How Stripe Atlas can help

Stripe Atlas sets up your company's legal foundations so you can fundraise, open a bank account and accept payments within two business days from anywhere in the world.

Join 75K+ companies incorporated using Atlas, including startups backed by top investors like Y Combinator, a16z and General Catalyst.

Applying to Atlas

Applying to form a company with Atlas takes less than 10 minutes. You'll choose your company structure, instantly confirm whether your company name is available and add up to four co-founders. You'll also decide how to split equity, reserve a pool of equity for future investors and employees, appoint officers and then e-sign all your documents. Any co-founders will receive emails inviting them to e-sign their documents, too.

Accepting payments and banking before your EIN arrives

After forming your company, Atlas files for your EIN. Founders with a US Social Security number, address and mobile phone number are eligible for IRS expedited processing, while others will receive standard processing, which can take a little longer. Additionally, Atlas enables pre-EIN payments and banking, so you can start accepting payments and making transactions before your EIN arrives.

Cashless founder stock purchase

Founders can purchase initial shares using their intellectual property (e.g. copyrights or patents) instead of cash, with proof of purchase stored in your Atlas Dashboard. Your IP must be valued at $100 or less to use this feature; if you own IP above that value, consult a lawyer before proceeding.

Automatic 83(b) tax election filing

Founders can file an 83(b) tax election to reduce personal income taxes. Atlas will file it for you – whether you are a US or non-US founder – with USPS Certified Mail and tracking. You'll receive a signed 83(b) election and proof of filing directly in the Stripe Dashboard.

World-class company legal documents

Atlas provides all the legal documents you need to start running your company. Atlas C corp documents are built in collaboration with Cooley, one of the world's leading venture capital law firms. These documents are designed to help you fundraise immediately and ensure your company is legally protected, covering aspects like ownership structure, equity distribution and tax compliance.

A free year of Stripe Payments, plus $50K in partner credits and discounts

Atlas collaborates with top-tier partners to give founders exclusive discounts and credits. These include discounts on essential tools for engineering, tax, finance, compliance and operations from industry leaders like AWS, Carta and Perplexity. We also provide you with your required Delaware registered agent for free in your first year. Plus, as an Atlas user, you'll access additional Stripe benefits, including up to a year of free payment processing for up to $100K in payments volume.

Learn more about how Atlas can help you set up your new business quickly and easily and get started today.