Forming an LLC in Delaware has several benefits, including privacy protection, strong protection from creditors, the potential of forming a series LLC, state tax advantages, and a special court, the Court of Chancery, for business matters. These benefits make Delaware a popular place to form an LLC, even for companies which do not operate within the state.
LLCs are one of the newest forms of business organization. There now millions of LLCs in the United States, many of them formed in Delaware.
Important Considerations for Creating a Successful Business
If you’re looking to start a business, there are some key decisions you need to make at the outset as a basis for future success.
Here are some important questions to ask:
- Should you incorporate?
- What is the best state to incorporate in?
- What are your business goals and which entity aligns with them?
The Limited Liability Act was enacted by Delaware in 1992. The resulting new business entity, the Limited Liability Company, takes the best parts of a partnership and corporation. Hence, millions of companies are now choosing the LLC as their business entity.
Many LLCs are formed in Delaware without the intention of ever operating from there. They are solely taking advantage of the benefits.
The Benefits of a Delaware LLC
A few inherent benefits of a Delaware LLC are important in the following scenarios:
- when the company owns real estate
- when the LLC is a family-owned business
- for estate planning goals
- when the company uses fleet vehicles
- when the company depends on intellectual property
- when the company has potentially dangerous assets
When you form an LLC, business owners are called “members” and are treated in both of these ways:
- as a partnership for tax purposes
- as shareholders of a corporation in regards to limited liability
The laws for LLCs vary in each state, but Delaware’s have some benefits everyone can take advantage of. To begin with, you don’t need to visit the state, and there’s minimal paperwork.
A Delaware LLC has a contract called the LLC Operating Agreement. This is drafted by LLC members and determines company structure and rules. Since it’s drafted by members, the rules can be made flexible to suit the business while allowing it to remain an LLC. Also known as “freedom of contract,” this is the biggest benefit of the LLC over other business entities.
How Your Privacy Is Protected With an LLC in Delaware
For those who value the privacy of information, a Delaware LLC is a great choice, as you don’t need to list the names or address of members or managers. There are only two details an LLC certificate from Delaware requires:
- the name of the LLC
- the details of the registered agent in Delaware
A series LLC is a unique form of LLC available in eight states, including Delaware. With a series LLC, you create cells to keep your businesses separate. This means one asset’s profitability cannot incur the liabilities of another. A good example is a company with multiple rental properties because when one falters, the others can continue to flourish under the same LLC without being foreclosed.
Delaware LLCs have strong protection against creditors. If an LLC member has a judgment filed against them, the creditor cannot claim assets of the LLC, which protects everyone in the company. The personal liability of the members of an LLC is limited by law, meaning if an LLC fails with debt left behind, members are not liable. The maximum amount an LLC member could lose if the entity fails is their initial investment. In short, you’re safeguarding your personal assets from your business liabilities by forming an LLC in Delaware.
A “Charging Order” is the only remedy for creditors of Delaware LLC members. This means your business partner’s creditors cannot take over the company. What creditors can get is the economic distributions of the LLC for that specific business partner. There is no way they can get a controlling interest or the right to liquidate the LLC.
About Delaware LLC Taxes
LLC members get to choose how the IRS will tax the LLC’s income. There are four options:
- Disregarded — The members are treated like a sole proprietor, paying income and self-employed taxes on net business income.
- Partnership — The standard for multi-member LLCs
- S Corporation — There are rules to qualify for this tax treatment.
- C Corporation — Open to all LLCs; double taxation is involved.
There are three advantages of Delaware state taxes that influence a business running as a Delaware LLC but operating out of state.
- If the business doesn’t do any business in Delaware, there is no income tax (there is an annual Delaware LLC franchise tax of $300).
- There is no sales tax.
- There are no taxes on intangible income for things like trademark royalties. For companies with intellectual property, this is a big incentive.
If you need help with understanding how the benefits of a Delaware LLC can help you, you can post your legal need (or post your job) on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.