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Delaware is renowned for two primary attributes. Firstly, it’s celebrated for its absence of sales tax, making it an appealing destination. Secondly, it’s globally recognized as one of the most welcoming places for businesses, boasting the incorporation of nearly 67.6% of all Fortune 500 companies. Additionally, many limited liability companies (LLCs) choose Delaware as their launchpad.
Discover the process of establishing an LLC in Delaware through our informative step-by-step guide. We’ll guide you through each phase and emphasize key factors to consider.
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How to Form Your Delaware LLC (Step-By-Step)
Whether you opt to handle the formation of your Delaware LLC on your own or decide to simplify the process by engaging a business formation service, it’s essential to have a good understanding of the Delaware LLC formation procedure.
If you’re unsure about whether an LLC is the most suitable entity for your needs, our guide comparing various business entities can assist you in making the optimal decision for your business.
Step 1: Name Your Delaware LLC
The initial step in establishing an LLC in Delaware is to register the LLC name with the Delaware Division of Corporations. Your Delaware LLC name must be unique and conclude with “Limited Liability Company” or an abbreviation like “L.L.C.”
You can verify the availability of your LLC’s name using the Division of Corporation’s LLC lookup tool. Additionally, if your business name contains non-English words, a translation must be included in your filing.
Here’s a list of words or phrases that your LLC should not incorporate:
- Any reference to “bank,” “medical,” or related terms that might imply your LLC is a bank or medical facility (unless authorized by the Delaware Banking Commission or another regulatory body).
- Words deemed offensive, racist, or otherwise inappropriate by the Delaware Secretary of State.
- Terms like “Incorporated,” “Inc.,” or language that might mislead others into thinking you’re a corporation or a different entity instead of an LLC.
- Words or acronyms that could cause confusion with government entities (e.g., “NSA” or “IRS”).
It’s crucial to recognize that even if your company name is available, it may not comply with federal and state trademark laws. It’s advisable to conduct further research before proceeding with LLC formation in Delaware and consulting with a legal professional may be beneficial in ensuring compliance.
A helpful tip: If you’re not yet prepared to file your certificate of formation but wish to reserve your desired company name to prevent others from using it, you can request a name reservation. This reservation is valid for 120 days and requires a $75 filing fee.
Using a “Doing Business As” (DBA) in Delaware
Following a Delaware LLC name search, you’ll need to decide whether you want to operate under the name you’ve chosen for your LLC or if you prefer to use a fictitious “doing business as” (DBA) name. If your business covers multiple industries, it’s advisable to employ a formal LLC name (often the last name of the founding member(s)) to minimize confusion.
Subsequently, you can register DBA names for each distinct business aspect. However, these DBAs must be registered with the Delaware County where you operate.
Specifically, you’ll need to submit a notarized Registration of Trade, Business & Fictitious Name Certificate form in each Superior Court where you conduct business and pay the $25 fee, either in person or by mail.
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Step 2: Designate a Registered Agent
The subsequent step in the formation of a Delaware LLC involves designating an individual or a business entity to serve as your registered agent. A registered agent is responsible for receiving legal documents, such as service of process and other official notices, on behalf of your LLC.
In contrast to several other states that have more stringent requirements for who can serve as a registered agent for an LLC, Delaware mandates that the agent only needs to be a Delaware resident with a physical street address within the state. While some LLCs opt to appoint a member as the registered agent, most prefer to enlist the services of an independent third party unaffiliated with the LLC.
Delaware provides a roster of registered agents for your selection, or you can opt for an online service. Often, when you form an LLC through an online formation service, they can also offer a registered agent, which can aid in streamlining the process of establishing your Delaware Limited Liability Company.
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Step 3: File Your Delaware Certificate of Formation
Subsequently, in the process of creating your Delaware LLC, the individual responsible for organizing the LLC must submit a certificate of formation, commonly known as “articles of organization.” Filing this document is how the secretary of state will officially recognize your business and record vital information about your company. The certificate should include the following details:
- The name of your LLC
- The name and address of the registered agent
- The name and signature of the authorized individual completing the form
- Cover page
In addition to these requirements, there is an optional cover page section that allows you to include specific conditions and restrictions in your formation documents. This unique feature, specific to Delaware, enables LLCs to establish limited liability protections independently of the parent organization, if applicable.
For Foreign LLCs Operating in Delaware
If you already have an LLC established in a different state and intend to conduct business activities in Delaware, you must register your business within the state. Instead of filing a certificate of formation, as a new LLC would do, you’ll need to submit a certificate of registration for a foreign limited liability company.
Additionally, you’ll be required to provide a certificate of existence from your LLC’s home state and pay a filing fee of $200. Many other states may refer to this document as a certificate of good standing.
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Step 4: Draft an Operating Agreement
This step holds paramount significance in the process of learning how to initiate an LLC. Delaware is one of just five states where the establishment of an LLC operating agreement is mandatory when there are multiple company members involved.
Delaware’s LLC regulations do not necessitate the formal submission of this agreement to the state, but when you officially register your company with the state, you commit to having an operating agreement in place that governs your company’s operations. While single-member LLCs in Delaware are not obligated to draft operating agreements, it’s typically advisable to do so.
The operating agreement for LLCs serves as a legally binding contract that delineates how the LLC will be managed and specifies the rights and responsibilities of each member. Furthermore, this document delineates the LLC as a distinct business entity, separate from any personal transactions. Consequently, the operating agreement plays a pivotal role in safeguarding personal assets from potential company liabilities.
Key components commonly found in an LLC operating agreement encompass:
- Classes of interests: Detailing various classes of members and the differing rights they possess concerning the LLC’s operations, such as voting rights.
- Management: Clearly stating whether the LLC is managed by a board, a single member, multiple members, an appointed manager, or any other management structure.
- Fiduciary duties: Addressing default fiduciary duties that may be imposed unless you specify modifications or limitations.
- Profits and distributions: Establishing how profits and losses are allocated among the members and providing related specifics.
- Transfer of interest: Outlining the rules and conditions for members who wish to transfer their interest in the LLC or withdraw entirely from it.
- Raising capital and adding members: Defining the procedures for raising new funds and admitting new members to the LLC.
- Dissolution: Specifying the circumstances that would trigger the dissolution of the LLC and the procedural steps for accomplishing this.
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Step 5. Obtain an Employer Identification Number (EIN)
If your LLC comprises more than one member or employee, you will be mandated to acquire a Federal Tax ID number, also referred to as an employer identification number (EIN), from the Internal Revenue Service (IRS). This unique 9-digit identifier primarily serves tax-related purposes, but it may also be a prerequisite for engaging in various essential business activities, such as:
- Employing staff
- Establishing a business bank account
- Conducting transactions with vendors
- Securing a business loan
Given these considerations, even single-member LLCs should contemplate applying for an EIN, particularly because the application process is free, swift, and can be conveniently completed online. Upon submission, your Delaware LLC will be assigned an EIN. Additionally, the state will furnish new businesses with a 7-digit number for state tax purposes and other LLC-related applications.
If you’re operating as a single-member LLC and choose not to obtain an EIN, you’ll be compelled to use your Social Security number on legal documents that necessitate an EIN. Opting for an EIN, however, is a prudent choice to bolster your security and avoid the exposure of your personal information.
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Maintain Your Delaware LLC
Following the dedicated time and effort invested in launching your business, it’s crucial to ensure the ongoing vitality of your Delaware LLC. This entails meeting necessary licensing prerequisites to maintain its active status and fulfilling tax obligations to sustain your business operations.
Furthermore, upholding sound business practices is essential to safeguard your LLC’s well-being, especially in the event of challenging circumstances.
No Annual Report Requirement
In contrast to the regulations in many other states that necessitate the submission of an annual report to maintain the active status of an LLC, Delaware does not impose this requirement.
In these other states, the annual report serves as an opportunity for LLCs to update their contact information to keep their LLC records current. As Delaware lacks annual reporting obligations, you must use alternative methods to notify the state of any changes in information.
For instance, if there is a change in your registered agent or their address, you must inform the state by submitting a form and paying a $50 filing fee. If any other alterations are needed in various sections of your certificate of formation, you will be required to file an amendment and pay the $50 fee.
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Complying with Tax Requirements
Every Delaware LLC, whether domestic or foreign, is obligated to pay an annual state tax of $300. The tax for the previous year must be settled by June 1. Failure to make a timely payment will result in a penalty of $200 and a monthly interest charge of 1.5% on the outstanding tax and penalty.
The specific tax obligations for your LLC will vary based on the chosen tax classification. You can maintain the LLC’s taxation structure as an ordinary pass-through entity, or you can opt to have the LLC classified as an S-corp or C-corp.
Under the ordinary pass-through structure, the LLC’s member(s) will be responsible for paying income taxes on the earnings generated by the company for the given tax period. Delaware follows a graduated tax rate that undergoes annual adjustments.
LLC vs. S-corp
Both LLCs and S-corps are classified as pass-through tax entities, meaning the LLC’s income is passed through to its members or employees, and the LLC itself does not incur taxes on its earnings.
However, with an S-corp, the members are treated as employees of the business and receive compensation in the form of a salary, while the remainder is regarded as dividends. This approach can result in significant tax savings for members/employees but is subject to specific conditions established by the IRS.
LLC vs. C-corp
A C-corp, or C-corporation, is a distinct corporate entity, and for an LLC to enjoy the full benefits of corporate status, it must undergo incorporation.
Although an LLC can elect to be treated as a corporation solely for tax purposes, this is typically not advantageous and may lead to increased tax liabilities rather than tax reductions. C-corps pay taxes at the corporate level on their income, and shareholders are subject to an additional investment income tax on dividends received from the C-corp.
Opening a Business Bank Account
One of the initial steps to take after your certificate of formation has been approved, and your operating agreement is in place is to open a bank account and acquire a business credit card for your LLC. Separating your Delaware LLC’s assets from your personal assets is a crucial measure in safeguarding the limited liability protection provided by the LLC structure.
By doing so, in the event that your LLC encounters debt or faces a legal challenge where a successful party seeks payment, they can only access the funds held in the business account. Your personal account remains shielded by the limited liability feature inherent to an LLC.
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Securing Business Insurance
Obtaining business insurance for an LLC holds a significance akin to the necessity of auto insurance for your car. The specific type of insurance and the extent of coverage required will vary depending on the nature of your business.
For instance, an LLC engaged in remote operations and offering online services may not need comprehensive property coverage for its “office space.” However, if your company deals in products that could potentially have defects, having insurance that covers product liability becomes critically important.
Obtaining a Business License
Next, you must apply for a business license for your LLC in Delaware, a requirement that sets Delaware apart from many other states. To do this, simply create a “One Stop” account and complete the online forms. The filing fees vary from $50 to $450, depending on your business type, and the processing time is approximately 10 days. Additionally, you’ll receive a temporary 60-day license upon submission.
In some Delaware cities and counties, you might also need a local business license. Check with your local government agency to see if your jurisdiction mandates one. If you’re a licensed professional operating in Delaware, you must also obtain a license from the Delaware Division of Professional Regulations.
Hiring Employees
When contemplating the hiring of employees for your Delaware LLC, certain requirements exist to ensure your compliance with state regulations. If you decide to bring on employees, you should undertake the following actions:
- Obtain your Employer Identification Number (EIN)
- Request the completion of an employee eligibility form to confirm the eligibility of your employees to work and establish their identities
- Establish a procedure for tax collection and payment
- Secure workers’ compensation insurance
- Report newly hired employees within 20 days of their recruitment
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Ways to Start a Delaware LLC
Upon obtaining a Delaware LLC, you have three primary options to consider. Your selection should be based on what suits your business best, taking into account factors such as the time available, budget constraints, and the intricacy of your business framework.
DIY
Similar to various other tasks, you have the option to establish your Delaware LLC independently. This is a suitable choice for individuals who possess the time and perseverance needed to navigate the filing process. While this approach incurs only the filing fee as a cost, it might prove more time-intensive than anticipated. Additionally, any errors made will require you to rectify the filing and cover any supplementary state processing fees.
Even if you opt for a do-it-yourself approach for certain aspects of the formation, you can still utilize an LLC service to fulfill other essential LLC requirements, such as registered agent services, applying for an EIN, and crafting an operating agreement.
LLC Formation Service
If you seek a quick and straightforward method for filing, your search ends here. Opting for an online formation service proves to be a superb option for entrepreneurs involved in the Delaware LLC formation process, regardless of the stage.
With numerous such services, you will receive guidance at every stage and the opportunity to engage with an expert if you have any inquiries. This option is favored for the reassurance it provides, surpassing the cost-effectiveness of the DIY approach.
Most of the services mentioned above will only bill you for the identical state fees you’d incur when forming your business independently.
ZenBusiness
When you partner with ZenBusiness, there’s no need to worry about the paperwork involved. This company provides a wide range of LLC services dedicated to ensuring that your business is established correctly, with all the necessary paperwork completed and submitted to the appropriate state government branch. While ZenBusiness does have service fees, customers attest that they receive excellent value for their investment.
Northwest Registered Agent
Commencing a business often involves a maze of state-mandated paperwork, which can be perplexing for new business owners. Northwest offers business services designed to assist entrepreneurs in locating the right documents, completing them accurately, and submitting them promptly to the relevant government agency. Besides aiding in LLC establishment, Northwest offers a range of additional services, including registered agent services, which prove beneficial to new business owners.
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Incfile
Incfile offers a valuable resource library to guide first-time business owners in determining the type of business they should establish. Subsequently, Incfile assists with documentation and filing processes, making concepts like a registered agent, articles of organization, and EIN easier to understand. The company enjoys a strong reputation and receives favorable online reviews.
Hiring an Attorney
The most costly approach involves hiring a business attorney to oversee your LLC formation, with fees ranging from $150 to well over $1000 per hour, depending on your location.
Business owners with financial connections to external investors or those dealing with complex accounting structures may consider altering their tax status and consulting an attorney when learning how to initiate an LLC.
A simple “LLC lawyer near me” search can help you locate the finest local business attorneys in your area. For most businesses, the LLC formation service route will be the preferred choice for establishing an LLC.
How to Form an LLC in Delaware – FAQs
Does Delaware Require a Physical Address for LLCs?
In Delaware, there’s no mandate for a business entity to have a physical presence within the state to operate as long as it’s officially registered in Delaware and has a registered agent physically located in the state and readily available.
Hence, having a virtual address for your LLC (an address used for receiving mail and communicating with business associates) can be advantageous in upholding a professional image for prospective customers and business partners.
Can I Start a Series LLC in Delaware?
Certainly, you have the option to establish a series LLC. Delaware is one of the select states that acknowledges the series LLC structure and permits its formation under its LLC regulations. A series LLC is essentially an organization that contains multiple subordinate entities under its umbrella. These subordinate entities can take the form of LLCs, corporations, or any other type of business entity.
Within this arrangement, each distinct entity within the series maintains its own liability, manages its separate accounts, and is governed by its distinct operating agreement. Opting for a series LLC, as opposed to a standard LLC, can offer an added layer of protection against liability.
To illustrate, consider a series LLC named “Big LLC” that houses “LLC 1,” “LLC 2,” and “LLC 3.” If a legal case is brought against LLC 3 and it incurs a loss, only the assets of LLC 3 are subject to collection by the prevailing party. However, if all assets were consolidated under Big LLC instead of being distributed among smaller entities, all of the assets would be vulnerable to collection.
How Long Does It Take To Get an LLC in Delaware?
Following the submission of your certificate of formation, anticipate a waiting period of approximately 3 to 4 days before you receive both approval and your business identification number.
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About the author
Dr. Gabriel O'Neill, Esq., a distinguished legal scholar with a business law degree and a Doctor of Juridical Science, is a leading expert in business registration and diverse business departments. Renowned for his academic excellence and practical insights, Dr. O'Neill guides businesses through legal complexities, offering invaluable expertise in compliance, corporate governance, and registration processes.
As an accomplished author, his forthcoming book is anticipated to be a comprehensive guide for navigating the dynamic intersection of law and business, providing clarity and practical wisdom for entrepreneurs and legal professionals alike. With a commitment to legal excellence, Dr. Gabriel O'Neill, Esq., is a trusted authority dedicated to empowering businesses within the ever-evolving legal landscape.