About half of all the publicly-traded companies in the United States decide to incorporate in Delaware. They do so for a variety of reasons, with all of them seen as favorable to the business involved when compared to other states.
The first LLC structure in Delaware with the current setup was introduced in 1996. The goal was to form a specific entity which consisted of individualized separate interest. Under the laws of the state, each series LLC can hold its own assets, have its own members, and conduct its own operation. Even different business objectives can be pursued while remaining insulated from various claims.
These advantages are usually specific to the company, involving taxation policy, the Court of Chancery, flexible corporate laws, or even the speed of government-based customer service. It is not a one-size-fits-all situation, especially if the business structure you are starting is a limited liability corporation.
Many of the benefits that come with incorporating in Delaware apply to larger businesses only. Local businesses in the state also benefit from this option. For LLCs that are focused on their own communities, however, the decision to create a Delaware LLC is likely not an option to consider.
Here are the advantages and disadvantages of a Delaware LLC to think about.
List of the Advantages of a Delaware LLC
1. It offers access to a well-respected legal system.
The Court of Chancery in Delaware specializes in corporate issues. Unlike other states, the court uses judges to decide cases instead of a jury for business matters. That means litigation will be heard by a judge who is familiar with the complex business matters involved. Their expertise, along with the availability of legal representation familiar with the justice system, helps to reduce the legal risks that the average LLC faces when doing business.
2. It offers more flexibility in structures.
Delaware doesn’t require your directors, officers, or shareholders to be residences of Delaware when incorporating your business. The state allows just one person to be the only officer, shareholder, or director of the LLC. In other states, you may be required to have one person in each role instead. You’ll still be required to maintain a registered agent with a Delaware address, but the overall personnel responsibilities are less restrictive.
3. It provides more privacy for your organization.
Delaware is one of the few states in the U.S. which allow the director and officer names of the company to be excluded from the documentation. You are not required to disclose your identity on the formation documents. For those looking for an extra layer of privacy, a Delaware LLC is a solid option, especially if you have plans to do business within the state at some point.
4. It creates more investor interest.
Most venture capitalists and angels looking to invest in a new company prefer those that have incorporated in Delaware. That is because of all the advantages which are offered by this registration when compared to the other states. Although it may be more expensive for a small business to maintain a dual registration if they are out-of-state, the potential for higher levels of investment may offset that potential disadvantage. It’s usually easier to incorporate upon formation rather than trying to convert to a new LLC when you’ve attracted the attention of a large investor.
5. It has specific tax advantages for businesses to consider.
Nevada and Wyoming are preferred states for businesses because they do not have a corporate income tax in the state. Delaware cannot offer that advantage, though it does have a tax law that is very friendly to businesses. Once an LLC is formed in Delaware, if you do not conduct any business in the state over the course of the year, then you do not pay a corporate income tax. There is a franchise tax to consider. There are no tax royalty payments or intangible assets.
6. It offers shareholder tax advantages.
There are tax advantages for shareholders in a Delaware business as well, which is why investors prefer incorporation within the state compared to others. Any stock shares that are owned by individuals outside of the state are not subject to Delaware’s taxes. Non-residents do not pay a personal income tax either.
7. It offers access to various series within the structure.
Delaware offers businesses access to what is called a series LLC. The LLC is treated as a single identity, which means it only pays one annual franchise tax. Then different series can be formed within the Delaware LLC. Each series can be treated as an individualized LLC within the umbrella of the original incorporation without the requirement to pay extra franchise taxes or have additional registered agents. At the same time, each series has a level of legal separation from every other.
8. It offers quicker filing speeds for tax reporting.
In Delaware, a tax filing for an LLC can be guaranteed to be processed in less than an hour, allowing the corporation to move forward with other business matters. Other states offer an expedited system for filing as well, though most require a minimum of 24 hours before the filing will be accepted. There may be added fees for the expedited service which go beyond the fees charged for rush processing in Delaware.
9. It allows you to hire a registered agent to act on your behalf.
If your business exists outside of Delaware, you can overcome the issue of having a registered agent present with a local address by hiring one. There are local companies which act in this service for your business for as little as $45 per year.
10. It provides multiple taxation options.
A Delaware LLC can choose to be taxed in multiple ways. The default position is to be taxed as a C corporation. New companies can also choose to be taxed as a pass-through entity, as an S corporation, or the default choice. There is no requirement to obtain a business license if you’re not doing business in the state. That means you don’t need to registered with the Department of Revenue either, nor pay the gross receipts tax.
List of the Disadvantages of a Delaware LLC
1. It requires dual-registration for out-of-state LLCs.
The reason why it is not beneficial for small businesses to incorporate their LLC in another state because it requires a dual registration. Not only would you be incorporating in Delaware, you would also be incorporating in your state of residence. That means you’d be forced to create two reports each year on the status of your business. There would be two state tax returns to file. You’d also be required to pay for two sets of filing fees to incorporate and renew over each period.
2. It requires you to maintain another registered agent.
If your LLC is based in a state outside of Delaware, then you’ll be required to maintain a registered agent in that state. You would also be required to maintain a registered agent within Delaware to maintain the dual registration. That means you must have someone with a business address in each state that can be contacted for business purposes. Registered agents are responsible for the receipt of legal documents, which means more costs for the business.
3. It requires dual legal representation.
If you have an attorney for your business, then they must be able to conduct business in Delaware and your home state to provide you with the representation required. Most attorneys are only licensed in the state where they are doing business. That means you face the cost of paying for your attorney to become licensed in another state or the cost of bringing another attorney in on retainer.
4. It complicates your litigation.
Even if you have a solid legal contract in place to deal with litigation, because you would be maintaining a Delaware LLC and one that is out-of-state, your business may be forced to follow the laws of both states when a resolution is applied to the situation. That may be advantageous in certain situations, but for the average small business, the added complications create added costs and potential risks, which creates a disadvantage.
5. It offers structures which have not been legally tested.
When considering Delaware for a series LLC instead of a traditional LLC, the unique structure of the business has not yet faced a legal test. Outside of the state, most courts would likely disregard the separate assets, liabilities, and records of each series, ignore the legal separation, and treat the overall umbrella LLC as the main corporation for everything. Even in Delaware, the separations are largely untested in various areas of litigation.
6. It may be difficult to obtain separate identification numbers.
Because the structure of a Delaware LLC can be very unique if the series option is chosen, the separate entities within the incorporated company may be unable to obtain unique identification numbers for federal tax purposes. Because each series is treated as its own LLC, those operating it want their own federal tax ID number, which can be difficult to obtain.
7. It may cost more to do business outside of Delaware.
Most states don’t recognize the concept of a series LLC, so every Delaware LLC is treated as a standard incorporated limited liability corporation. The taxation structures are unique for a series LLC in Delaware as well, which means there are higher administrative costs. Accountants may be unfamiliar with the structure, creating higher costs there as well. For a small business looking to incorporate, these complications may make it more difficult to find profitability, despite the advantages which may be available.
8. It does not offer a flat franchise tax.
The franchise taxes in Delaware are based on the actual value of the shares of the corporation instead of revenues, sales, or a flat fee based on the classification of the business. The minimum tax is $75 per year, with a $50 filing fee. The maximum franchise tax is $180,000. Although the series LLC only pays this once for each entity, the costs can be high to a business with strong share valuation, but limited cash flow.
9. It may offer higher incorporation filing costs.
The costs of incorporating in Delaware are rather low compared to other states, though they may be higher than what some may face locally. The state filing fee for the LLC is just $90. For an extra 10%, the certificate can be filed within 24 hours. Certified copies of the LLC filing, which cost $50 through the state, are often required to open a business account. There are fees for a Certificate of Good Standing as well.
10. It may trigger foreign qualification costs.
For a Delaware LLC, doing business outside of a home state may trigger foreign qualification. You’ll need to talk with your home state to determine what documents are required from Delaware should this be required. Processing times for filing the application for this qualification can be as much as 10 business days, which can extend the start-up time for the company.
These Delaware LLC advantages and disadvantages attract Fortune 500 companies to create new opportunities because of the unique structures involved. For the average small business looking to incorporate with headquarters outside of the state, the liability of dual registration, dual franchise taxes, and other responsibilities may not make it a suitable decision. Always speak to trusted, experienced legal representatives about incorporation and its risks before finalizing a decision.