A Delaware limited liability company (LLC) is a popular business structure for entrepreneurs and companies because of Delaware’s flexible, business-friendly statutes. Of the business entities formed in Delaware in 2023, 73% were LLCs. Delaware’s legal environment is favourable for business owners because it features a specialised court system, the Court of Chancery, that handles business disputes swiftly, without juries. The state also offers considerable flexibility in the structure and governance of an LLC, which can be particularly attractive for startups and venture capital-backed ventures.

Setting up an LLC in Delaware does not require the business owner to reside in the state, and Delaware LLCs do not pay state income tax on income derived outside of Delaware, which makes it a strong choice for businesses that operate in multiple states or countries. Delaware’s privacy policies do not mandate the disclosure of LLC members’ identities in filings, which provides an additional layer of privacy, and favourable franchise tax rules can lead to considerable savings for larger companies. These features make Delaware a strategic choice for many businesses seeking flexibility, privacy, and a business-friendly tax structure.

Below, we’ll explain how to form and operate a Delaware LLC.

What’s in this article?

• Can a single person form an LLC?
  
• Can LLCs have employees?
  
• Benefits of forming a Delaware LLC
  
• How to set up a Delaware LLC
  
• Delaware LLCs and tax implications
  
• Key considerations for managing a Delaware LLC
  
• How a Delaware LLC compares to other business structures
  
• Legal protections for Delaware LLC owners
  
• Integrating a Delaware LLC with Stripe services
  

Can a single person form an LLC?

Yes, a single person can form an LLC. This type of LLC is commonly referred to as a single-member LLC. It has the same legal protections and flexibility in terms of structure and operation as multimember LLCs. The owner of a single-member LLC has limited liability, which means their personal assets are generally protected from the liabilities and debts of the business. This structure is popular with solo entrepreneurs because it combines the simplicity of sole proprietorship with the protective advantages of a corporate structure. Single-member LLCs can choose to be taxed either as a sole proprietorship or a corporation, which provides further flexibility in financial planning and tax obligations.

Can LLCs have employees?

Yes, an LLC can have employees. Like other business structures, an LLC can hire employees as part of its operations. This allows an LLC to grow and expand its business capabilities beyond what a single member or a group of members can manage by themselves.

When an LLC hires employees, it must comply with all relevant employment laws, including those pertaining to wages, workplace safety, and discrimination. The LLC must also handle employer responsibilities such as withholding income taxes and paying employer contributions for Social Security and Medicare.

Benefits of forming a Delaware LLC

Here are some advantages of forming a Delaware LLC.

• Legal environment: Delaware is known for its business-friendly legal environment. The state’s Court of Chancery is a unique judicial body that exclusively handles business disputes, often without juries, leading to expert decisions based on business law. This results in quicker resolutions to legal matters compared to other states.

• Flexibility: Delaware law allows LLCs flexibility in how they structure their management and operations. This flexibility helps businesses that want to create custom governance and profit-sharing arrangements to suit specific business needs.

• Privacy: Delaware provides high levels of privacy for business owners. The state does not require LLCs to publicly disclose the names of its members or managers in the formation documents.

• Tax benefits: Delaware does not impose income tax on LLCs that operate outside the state, and the franchise tax for LLCs is lower than annual taxes imposed by states such as California.

• Ease of formation and maintenance: Setting up an LLC in Delaware is straightforward, and the ongoing maintenance requirements are minimal. The state allows business owners to file documents electronically, and it offers a simplified process for both formation and annual filings. This can save time and reduce administrative burdens.

• Reputation: Delaware’s reputation as being corporate-friendly can provide a reputational boost to businesses. Being registered in a state known for its solid corporate laws can improve a business’s credibility with investors, banks, and other stakeholders.

How to set up a Delaware LLC

Follow these steps to set up an LLC in Delaware.

• Choose a name for your LLC: Your LLC’s name must be unique and not already in use by another registered entity in Delaware. The name must include “Limited Liability Company” or an abbreviation such as “LLC” or “L.L.C.” You can check the availability of a name through the Delaware Division of Corporations website.

• Appoint a registered agent: Delaware requires every LLC to have a registered agent with a physical address in the state (PO Boxes are not acceptable). The registered agent is responsible for receiving legal and official documents on behalf of the LLC.

• File the Certificate of Formation: To officially form your LLC, you must file a Certificate of Formation with the Delaware Division of Corporations either online or by post. You must include the LLC’s name, the address of the registered agent, and the signature of an authorised person or the registered agent. Usually, this is the stage at which you pay the filing fee.

• Create an operating agreement: Although Delaware does not require it, consider creating an operating agreement to outline the ownership and operating procedures of the LLC. This document is internal and does not need to be filed with the state, but it can help you manage the business more efficiently as well as prevent misunderstandings among members.

• Obtain an EIN: If your LLC will have employees, or if you choose to be taxed as a corporation instead of a sole proprietorship, you will need to obtain an Employer Identification Number (EIN) from the IRS. You can apply for an EIN online or by post.

• Register for state taxes: If you will be doing business in Delaware or hiring residents of Delaware as employees, you might need to register for one or more state tax accounts – including sales tax, withholding tax, and unemployment insurance tax.

• Comply with local permits and licences: Depending on the nature of your business and its location, you might need specific permits and licences to operate legally. Check with local county and city governments to ensure compliance with local regulations.

• Annual franchise tax: Delaware requires LLCs to pay an annual franchise tax to maintain good standing. This is due by 1 June and can be filed and paid online through the Delaware Division of Corporations website.

Delaware LLCs and tax implications

LLCs in Delaware face the following tax obligations:

• Franchise tax: Delaware requires LLCs to pay an annual franchise tax, which is a flat fee rather than a percentage of revenue. This fee is due by 1 June and is relatively low compared to annual taxes in other states such as California.

• Pass-through taxation: By default, LLCs are treated as pass-through entities for federal tax purposes. This means that instead of the LLC paying corporate income tax, the profits and losses of the business “pass through” to the individual members’ tax returns, and members pay personal income tax on their share of the LLC’s earnings. LLCs can choose to be taxed as corporations, if this would be more beneficial, by filing IRS Form 8832.

• Employer taxes and responsibilities: If your LLC has employees, even if they are in a different state, the LLC must register for an EIN and might be subject to payroll taxes including Social Security, Medicare, and unemployment insurance taxes.

• Sales tax: If the LLC sells goods and services in Delaware, it must comply with state sales tax requirements. This involves registering for a sales tax permit and collecting and remitting sales tax to the state.

• State taxes: If the LLC owns property in Delaware or has major business operations in the state, other state taxes such as income tax apply. If your LLC is formed in Delaware but conducts business elsewhere, it does not need to pay Delaware state income tax on the income earned outside of Delaware.

• Local taxes and licences: Depending on its activities and location of operation, the LLC might also be subject to local taxes, permits, and licensing fees. These can vary from one locality to another.

Key considerations for managing a Delaware LLC

Here are some key considerations to keep in mind when managing a Delaware LLC.

Legal requirements

• Licenses and permits: Depending on the nature of your business and your location, you might need specific licences and permits. Obtain and renew all required local, state, and federal licences to legally operate your business.

• Registered agent: Your registered agent must have a physical address in Delaware and be available during normal business hours to accept legal and official documents. You can hire a registered agent service or act as your own agent if you have a Delaware address.

• Employment laws: If your LLC has employees, comply with federal and state employment laws. This includes withholding employee taxes and contributing to unemployment and workers’ compensation funds.

• Foreign qualification: If you plan to do business in other states, you’ll need to register your Delaware LLC as a foreign entity in those states. This involves filing additional paperwork and paying fees in each state.

• Reporting changes: Any major changes to the LLC – such as changes in management, business address, or the registered agent – must be reported to the Delaware Division of Corporations. Filing the necessary amendments keeps your business information up-to-date on public records.

Tax obligations

• Annual franchise tax: This tax is due on 1 June, regardless of your LLC’s income or activity. Failure to pay can lead to penalties, loss of good standing, and administrative dissolution of your LLC. You can pay online through the Delaware Division of Corporations website.

• Federal and state taxes: Ensure compliance with IRS requirements, which involve filing the appropriate tax returns and making the necessary payments. This might include income tax, payroll tax, and other applicable federal taxes. If your LLC operates, sells products, or has employees in states other than Delaware, you might need to comply with those states’ tax filing requirements, too. This includes state income tax, sales tax, and other relevant taxes. Consult with a tax professional to understand your LLC’s tax obligations, and ensure you file and pay all federal, state, and local taxes on time.

Operations

• Operating agreement: This is a legally binding contract that governs the internal operations of your LLC. It should address management structure; ownership percentages; member rights and responsibilities; decision-making processes; profit and loss allocation; dispute resolution procedures; and other operational protocols.

• Recordkeeping: Keep careful records of your LLC’s financial transactions, contracts, meeting minutes, and other important documents. This will help you track your finances, make informed decisions, and comply with tax and legal requirements.

• Business succession: Create a succession plan to address what will happen to your LLC if you become incapacitated, retire, or decide to sell your interest. This plan should outline how ownership will be transferred, how management will transition, and how your LLC’s assets will be distributed.

Asset protection

• Banking: Maintain a separate bank account for your LLC to avoid mixing personal and business funds. This simplifies accounting, protects your personal assets, and helps you maintain the limited liability protection offered by your LLC.

• Insurance: Obtain adequate insurance coverage to protect your LLC from potential risks such as lawsuits, property damage, or employee injuries. Types of insurance to consider include general liability insurance, professional liability insurance, workers’ compensation insurance, and commercial property insurance.

• Intellectual property: If your LLC owns valuable intellectual property – such as trademarks, copyrights, or patents – register them with the appropriate government agencies to protect your rights and prevent others from using them without your permission.

How a Delaware LLC compares to other business structures

Choosing the right business structure is a major decision for any business owner. Each structure comes with its own advantages and disadvantages, and not every structure is a good fit for every kind of business. To help boil down the basics of each option, here’s a quick comparison of Delaware LLCs with other common business structures.

LLC vs. sole proprietorship

LLC vs. partnership

LLC vs. S corp

LLC vs. C corp

Legal protections for Delaware LLC owners

Delaware LLCs come with certain legal protections for owners, adding to their appeal for entrepreneurs and investors. Here are the main legal shields Delaware LLCs provide owners.

• Limited liability protection: The fundamental legal protection that a Delaware LLC offers is limited liability for its owners, known as members. This means members are typically not personally liable for the business debts and liabilities of the LLC. Their financial risk is limited to their investment in the LLC. This protection helps safeguard personal assets such as homes, cars, and savings, which would not be protected in business structures such as sole proprietorships.

• Separate legal entity: A Delaware LLC is considered a separate legal entity from its owners. This separation means that the LLC can own property, enter into contracts, and sue or be sued in its own name, rather than in the names of its members. This distinction further boosts the liability protection and adds a layer of professionalism and credibility in business dealings.

• Charging order protection: Delaware provides strong charging order protections. A charging order limits the creditor of a debtor-member to only the distributional interests of the debtor in the LLC. This means creditors can potentially receive distributions that would otherwise go to the member, but they cannot interfere with the management of the LLC or force a liquidation of the LLC’s assets. This protects both the member’s interest in the LLC and the LLC’s assets from unrelated personal creditors.

• Flexible ownership and management structures: Delaware’s laws allow LLCs a high degree of flexibility in how they are structured and managed. LLC members can tailor the operating agreement to specify rights, duties, and protections according to their unique needs. This flexibility can include provisions for protecting minority owners, structuring financial interests, and setting specific governance rules that can prevent internal disputes and provide clear guidance for resolving them.

• Privacy: Delaware does not require LLCs to publicly disclose the identities of their members or managers in the formation documents. This privacy is a substantial legal shield for owners who wish to maintain anonymity in their business ventures.

• Legal precedence and expertise: Delaware’s renowned Court of Chancery specialises in corporate law and provides expert legal decisions specifically related to business entities. The established legal precedents and the expertise of this court provide Delaware LLC owners with a predictable and sophisticated legal environment. This can be particularly advantageous in disputes or legal complaints, as the state’s legal system is designed to handle business-related legal issues efficiently.

Integrating a Delaware LLC with Stripe services

Stripe can help your Delaware LLC accept payments, grow revenue, and operate more efficiently on a fully integrated platform.

To set up a Stripe account, go to the Stripe website and sign up. You’ll need to provide your LLC’s information, including its legal name, EIN, business address, and bank account details. Stripe will usually require you to verify your LLC’s identity and ownership too, which might involve providing additional documentation such as your Delaware Certificate of Formation or a government-issued ID.

Once your account is active, explore the available Stripe products and services such as payment processing, invoicing, subscriptions, and fraud prevention tools. Choose the ones that best suit your business needs and activate them on your account. Refer to Stripe’s comprehensive documentation and resources to guide you through the integration process and address any technical questions.

Here are some Stripe services you might find helpful for your LLC.

• Stripe Checkout: Embed this pre-built, customisable checkout page on your website or mobile app. This allows customers to securely enter their payment information and complete purchases.

• Stripe Invoicing: Create and send professional invoices to your clients while offering them a variety of payment options. This can simplify your billing process and improve cash flow.

• Stripe Connect: If you run a platform or marketplace, Stripe Connect helps you manage payments between your users and vendors.

• Stripe Atlas: If you’re just starting your Delaware LLC, consider using Stripe Atlas to help you file the documents to form your LLC, obtain an EIN, and issue founder equity – along with providing access to Stripe services.

• Stripe API: For more advanced integration, use the Stripe API to build payment solutions customised to your specific requirements.