How to create an LLC in Delaware: A step-by-step guide

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  1. Introduction
  2. What is an LLC in America?
  3. Benefits of forming an LLC in Delaware
  4. How to form an LLC in Delaware

For US or international businesses seeking a favourable climate for incorporation, Delaware is an excellent choice. It's not a coincidence that over 60% of Fortune 500 companies are incorporated in this US state – Delaware's flexible corporate laws, specialised business court and emphasis on privacy are just a few important draws for businesses.

But for both US and international businesses, the journey to incorporation involves more than just choosing the state in which 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 that they comply with all legal requirements. With over 1 million businesses taking advantage of Delaware's incorporation services, understanding this process is an essential tool for any discerning businessperson.

By forming an LLC in Delaware, businesses can not only take advantage of the benefits offered by a state that prioritises their needs, but they can also ensure that they're on solid legal footing from the start. Forming an LLC in Delaware can be a strategic step in the business journey for US and international companies, but is one that requires the right approach and understanding.

What's in this article?

  • What is an LLC in America?
  • Benefits of forming an LLC in Delaware
  • How to form an LLC in Delaware

What is an LLC in America?

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 their 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
    As with corporations, an LLC shields its members from personal liability for business debts and claims. This means that if the business can't pay a creditor, the creditor cannot pursue any personal assets (such as a bank account, house, car etc.) 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 that have been designated by the members (manager-managed). This is not the case with corporations, which have a fixed management structure that includes 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 that 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, although some US states do impose an annual tax on LLCs.

Benefits of forming an LLC in Delaware

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

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

  • Flexible business laws
    Delaware has some of the most up-to-date and flexible business laws in the US. It permits the formation of single-member LLCs, which offers more opportunities for entrepreneurs who want to start a business on their own. Generally, Delaware's laws are favourable to management, which gives business owners an advantage in terms of decision-making and control over the business. The state's law also allows for "series LLCs", which permit the creation of separate legal entities – each with different members and managers – under the umbrella of a single LLC.

  • Court of Chancery
    The Delaware Court of Chancery offers businesses a unique advantage. This court specialises in business litigation and is renowned for its efficiency and expertise in handling complex corporate disputes. The judges, who are appointed for their proficiency in corporate law, provide faster and more predictable outcomes compared with general jurisdiction courts in many other states. This contributes to a more stable and predictable business environment, which can be highly beneficial for businesses and investors.

  • Privacy protections
    Delaware provides substantial privacy protections for LLC owners in the US. Unlike many other states, Delaware does not require the names of LLC members or managers to be disclosed in formation documents. Only the name and contact information of the LLC's registered agent (a person or business entity designated to receive legal papers on behalf of the LLC) is made public. This allows business owners to maintain their privacy.

  • No state income tax for out-of-state entities
    Delaware's tax system is also favourable to US businesses. If businesses form their LLC in Delaware but don't conduct business in the state, they are not required to pay Delaware income tax. It's important to note that Delaware levies an annual franchise tax, but it is generally minimal for most small businesses. Additionally, if your business operates in another state, it's likely that businesses will need to pay taxes in that state.

  • Investor and venture capitalist preference
    Some investors and venture capitalists prefer, or even require, that a company is incorporated in Delaware before they agree to provide funding. Investors favour Delaware for its predictable business laws, flexible business statutes and the Court of Chancery. Consequently, incorporating in Delaware can make a business more appealing to potential investors.

  • Ease of business operations
    Delaware's laws simplify business management. The state allows the formation of an LLC for any lawful business, purpose or activity, except for the business of banking. The members of an LLC are given broad latitude in structuring the company's management and have the ability to shape their own operational processes through the company's operating agreement.

  • Ability to incorporate remotely
    Delaware permits non-residents to form a business in the state, which allows individuals and entities from anywhere in the world to take advantage of Delaware's business-friendly environment. This is particularly useful for international businesses which want to operate under the legal framework of US law.

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 which ensure that the legal and operational structure of your new business entity follows state and federal laws. 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. The following steps offer a guide to forming an LLC in Delaware:

  1. Choose a name for your LLC: your first step is to decide on a name for your LLC. The name should be distinguishable from the names of other business entities that are 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 working hours.

  3. File the Certificate of Formation: to officially create an LLC in Delaware, businesses must file a Certificate of Formation with the Delaware Division of Corporations. This document includes basic information about the business, including its name, and the name and address of the registered agent. Note that member or manager information is not required.

  4. Create an operating agreement: while Delaware does not require businesses to have an operating agreement from a legal perspective, it's a good idea to create one. This document outlines the ownership structure of your LLC and provides rules for how it will be run. It can include information about the division of profits and losses, the rights and responsibilities of members and managers, procedures for meetings and voting, and what happens if a member becomes incapacitated, dies or wants to sell their interest.

  5. Obtain an EIN from the IRS: most LLCs are required to obtain an EIN – or Employer Identification Number – from the IRS, which is used to identify the 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: Delaware requires LLCs to pay an annual tax of US$300 and file an annual report. The report and the payment are due by 1 June each year.

  8. Register as a foreign entity in other states (if applicable): if an LLC is formed in Delaware but the plan is to do business in other states, the LLC may need to be registered as a foreign entity in those states.

These steps provide a general guide for forming an LLC in Delaware, but the exact requirements may differ based on the specifics of the business. For example, the nature of the business's operations, industry and even its specific business model could mean additional steps or considerations. In addition, the legal and tax implications related to forming and running an LLC can be complex. Consider consulting a legal professional or accountant who can help with navigating the legal landscape and setting up the LLC correctly, by providing insights tailored to the unique circumstances.

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