Delaware might be the second smallest state in the country, but it’s a leader in business formation. More than one-third of Delaware’s income comes from business formation fees and taxes, and it’s a favorite state for Fortune 500 companies, small businesses, and tech startups. Although Delaware is normally associated with incorporation, the limited liability company (LLC) is actually the more popular business entity type in the state—making up nearly three quarters of new business filings.
The LLC structure is popular because it offers a combination of operational flexibility, legal protection, and tax advantages. But before you can enjoy these benefits, there are several steps to follow to set up a Delaware LLC and legally operate in the state. Here, we’ll break down everything you need to know to successfully form an LLC in Delaware.
Forming an LLC in Delaware: Step-by-Step Instructions
If you’re looking to set up an LLC in Delaware, you’ll need to register your business with the Delaware Division of Corporations. Even though the word “corporations” is in the name, this agency handles business formations of all types. The Division of Corporations defines the rules for entrepreneurs who want to form an LLC in Delaware or operate an out-of-state LLC in Delaware.
Here are the steps for forming an LLC in Delaware:
Step 1: Choose a Name for Your Delaware LLC
The fun and creative part of forming a Delaware LLC is choosing the name. As in most states, Delaware law requires you to choose a unique name for your LLC. In other words, it has to be different from the names of other businesses that have filed with the Division of Corporations, so the public won’t get confused.
Names for Delaware LLCs must end with “Limited Liability Company,” “LLC,” or “L.L.C.” You cannot use the word “bank” or any variation of it, but most other words are allowed in your business’s name. It’s okay to use the name of an LLC manager or member in your business name too.
You can do a search of name availability on Delaware’s entity search tool. If a name is available, the Division of Corporations gives you the option to reserve the name online for up to 120 days. You also can fax or mail a name reservation form to the Division of Corporations. Reserving a name has a $75 filing fee, which is on the high side compared to other states.
Keep in mind that a name reservation isn’t required to form your LLC, but it does guarantee that your name will be available for 120 days. A name being available through the Division of Corporations doesn’t necessarily mean that it complies with federal and state trademark laws. Ultimately, it’s up to you or your business lawyer to determine if your LLC’s name complies with state and federal requirements.
Source: Delaware Division of Corporations
Step 2: Choose a Registered Agent in Delaware
Every business entity that operates in Delaware must designate a registered agent. A registered agent is a person or company that accepts legal and official mail on your business’s behalf. They’ll be the first to notify you if your business is sued or receives a legal or tax notice from the government.
In Delaware, the registered agent must be a resident of the state. That could be a member or manager of the LLC. Alternatively, you can use a company that’s authorized to do business in Delaware as your registered agent. The LLC can even act as its own agent as long as the business has a physical office in Delaware. This is different from most states. Other than Delaware, most states prohibit an LLC from serving as its own registered agent.
For convenience, many businesses opt to use a third party registered agent service, such as IncFile. If you form your LLC on IncFile, they’ll include one year of free registered agent service. IncFile also provides a range of other online legal services.
Step 3: Obtain a Delaware Business License
Delaware has strict requirements on business licenses. Every business that’s organized in or operates in Delaware must obtain a state business license from the Delaware Department of Revenue. On top of the state business license, some Delaware cities and counties require you to get a license.
Members of certain regulated professions must obtain a license from the Delaware Division of Professional Regulations. Here’s a list of professions which are regulated by this agency. Businesses comprised of licensed professionals may choose to form a professional corporation or regular LLC. Delaware does not recognize professional LLCs.
Businesses that operate in Delaware are lucky for one reason—there’s no sales tax in this state! There are, however, other tax responsibilities which you might have to comply with, as we’ll explain more below.
Step 4: File Your Certificate of Formation
The next thing you need to do to form your Delaware LLC is to file your certificate of formation, also known as the articles of organization, with the Division of Corporations. You can access a fillable PDF of the certificate of formation on the Division of Corporations website. It must be faxed or mailed to the Division of Corporations; it cannot be filed online. The filing fee for the certificate of formation is $90.
The Delaware certificate of formation doesn’t require a lot of information. All you have to include is:
- The LLC’s name
- Registered agent’s name
- Registered agent’s address
- Name and signature of the organizer who is filling out the form (should be someone affiliated with the business)
- Cover page
Make sure you’re filling out the correct form for your company. Domestic LLCs—LLCs that are organized under the laws of Delaware—must fill out the certificate of formation mentioned above. Foreign LLCs—those that are formed under the laws of another state but want to do business in Delaware—must fill out a certificate of registration of a foreign limited liability company. You should accompany this filing with a certificate of existence from your home state and a filing fee of $200.
The state of Delaware is accustomed to handling a large volume of corporate and LLC filings, so they’ll generally only take a maximum of three to four business days to process your certificate of formation. After approving your filing, the state will send you a stamped copy of your certificate of formation. You should also receive a business identification number that you will use on other state paperwork to identify your LLC.
Source: Delaware Division of Corporations
Step 5: Draft an LLC Operating Agreement
Delaware is one of five states that requires members of an LLC to adopt an LLC operating agreement. The law doesn’t specify exactly when you have to enter into the agreement, but it’s a good idea to do so soon after filing your certificate of formation. Although a verbal agreement is allowed, it’s best to have a formal, written operating agreement.
At a minimum, include the following information in your operating agreement:
- The LLC’s purpose, including products or services offered
- The names and addresses of the members (and the manager, if there is one)
- Each member’s contributions of value to the LLC
- Each member’s ownership interest in the company, voting rights, and share of the profits and losses
- Procedure for admitting new members
- Procedure for electing a manager if the LLC is manager-managed
- Meeting schedule and voting procedures
- Dissolution process
The state doesn’t need to see a copy of your operating agreement, but you should store it with other important business records. When you use IncFile to form your LLC, they can also draft a custom operating agreement on your behalf.
Step 6: Comply With Employer Obligations
In addition to the requirements listed above, Delaware LLCs with employees have a few additional obligations, including:
- Employee reporting: State and federal law requires employers to report new employees within 20 days of their hire date.
- Pay employer taxes: Employers must withhold payroll taxes from their employees, file payroll tax returns, and deposit the withheld taxes with the Delaware Division of Revenue.
- Purchase workers’ compensation insurance: Delaware employers must register with the Division of Workers Compensation and purchase workers’ compensation insurance after hiring their very first employee, even if the employee is just part-time.
- Pay unemployment taxes: Employers in Delaware must also register with the state Department of Labor’s Division of Unemployment Insurance. Employer rates for unemployment taxes range from 0.3% to 8.2%.
A labor and employment attorney who specializes in Delaware law can help ensure that you’re in compliance with the state laws for employers.
Step 7: Pay Delaware LLC Taxes
All LLCs that are registered to do business in Delaware must pay an annual tax of $300, due on June 1 of each year. Delaware does not require LLCs to file an annual report.
As we mentioned above, Delaware does not charge sales tax on consumers. However, the state does charge a gross receipts tax on business owners. The amount of the gross receipts tax ranges from 0.0945% to 0.7468%, and varies depending on the business type.
Aside from these taxes, members of LLCs must also pay personal state income taxes on their share of the LLC’s profits. Unless an LLC elects to be taxed as a corporation, LLCs are treated as pass-through entities, and the business income passes through to an owner’s personal income tax return.
If your LLC elects to be taxed as a corporation, then you would follow Delaware’s corporate tax rules. Delaware corporations pay an 8.7% annual corporate income tax on the share of profits that are attributed to Delaware.
Step 8: Comply With Federal Requirements
The last step to forming your Delaware LLC is to comply with federal requirements. For example, Delaware LLCs with employees or multiple owners, and those taxed as corporations must apply for an employer identification number (EIN). The IRS requires you to provide your EIN when you file federal business taxes.
In terms of federal taxes, LLCs must file an informational tax return—Form 1065—and provide a Schedule K-1 to members. Alternatively, the members can elect for the LLC to be taxed as a corporation for federal tax purposes.
LLC members must also pay 15.3% self-employment taxes to cover social security and Medicare obligations. If you have employees, you must withhold federal social security and Medicare taxes from your employees and pay the employer share of these taxes. There’s also a federal component to unemployment taxes.
Benefits and Drawbacks of Forming an LLC in Delaware
There are several pros and cons to setting up your business as an LLC in Delaware. Many people prefer LLCs because they offer operational flexibility and are easier to maintain than corporations. However, there are also disadvantages to consider.
- Members aren’t personally liable for business debts and lawsuits.
- LLCs have fewer reporting and recordkeeping requirements than corporations and don’t have to file an annual report in Delaware.
- Delaware doesn’t require businesses to collect sales tax.
- LLCs avoid double taxation of C-corporations.
- LLC members can choose the business’s tax treatment.
- Delaware charges relatively high rates for state unemployment taxes.
- LLC members must pay high self-employment taxes at the federal level.
- Name reservation fees for new LLCs are high compared to other states.
- All Delaware businesses must obtain a state business license.
While weighing the pros and cons, consider other types of business entities in addition to the LLC structure. Sole proprietorships and partnerships are easy and inexpensive to form, though they offer little liability protection. If you’re planning to raise money from investors, consider a C-corporation or S-corporation. The ability to issue and sell stock makes the corporation a more suitable structure for fundraising.
Bottom Line on Forming an LLC in Delaware
Delaware is a haven for business formation, and setting up an LLC in Delaware can be a smart move if you’re looking for a combination of operational flexibility and legal protection. That said, we recommend walking through your business entity options with a lawyer before deciding to set up your Delaware business as an LLC. Once you’re ready to launch your LLC in Delaware, we suggest using IncFile to file your formation papers.