The LLC business structure is growing in popularity in various states throughout the United States, with Delaware being one of them. In addition to not imposing a sales tax, Delaware is also considered one of the most business-friendly states in the United States. According to Forbes, this particular state is home to nearly 67.6% of all U.S. Fortune 500 corporations.
With Delaware’s business-friendly model and no sales tax, you have the ability to scale business operations a lot quicker.
If you wish to start an LLC in Delaware, here is a complete guide on how to do so.
Also, feel free to check out our video on How to Start an LLC in Delaware.
6 Steps to Forming an LLC in Delaware
Below are the basic steps to forming an LLC in Delaware:
1. Name LLC
Before filing your LLC documents, you must first select a unique business name.
Delaware LLC state naming guidelines:
- The name must include “limited liability company” or the abbreviations “LLC” or “L.L.C.”
- The name cannot cause confusion with a government agency. For instance, it should not include words such as FBI, Treasury, or State Department.
- Make sure the name is available in Delaware. You can check on the Secretary of State's website if the name is already taken or not. If it's available and you're not ready to file your LLC paperwork immediately, you may reserve it for up to 120 days by filling out a Business Name Reservation form.
- Choose a name with an available URL, especially if you plan to develop a business website. (Required but not recommended)
- Restricted words like bank, doctor, or attorney must be supported with additional documents. When it comes to such fields, you'll also be required to have licensed professionals such as lawyers in your organization. In which case, you may want to consider forming a Professional LLC or PLLC.
2. Appoint a registered agent
A registered agent is a person or business responsible for sending and receiving critical legal documents on your behalf, such as tax forms, lawsuits, government correspondence forms, etc.
The agent must be an individual who is at least 18 years old and is a full-time resident in Delaware. This may be yourself or an employee. You can also hire a registered agent service that is authorized to conduct business in Delaware and has a physical street address in the same state.
Some third-party registered agent services such as IncFile provide the service free for one year.
3. File Certificate of Formation
This is a legal document required to create an LLC. Therefore, to successfully register your business, you should file a Certificate of Formation online, by mail, or in person with the Delaware Division of Corporations. If you choose to file by mail, you must include the Department of State cover sheet required for mailed filings and a check to cover the $90 non-refundable filing fee.
Certificate of Organization requires:
- Your LLC name
- The name and address of your registered agent
- The date of LLC formation
- Name and signature of the individual authorized to start the LLC.
- The business duration. It's usually indicated as “Perpetual” unless there's an intended purpose scheduled to end at a particular time.
- If your LLC is going to be member-managed or manager-managed. In a member-managed LLC, the owners are responsible for controlling the day-day business operations and important decisions. On the other hand, a manager-managed LLC assigns such responsibilities to a professional manager elected by the members.
4. Create LLC Operating Agreement
An operating agreement is an internal legal document outlining an LLCs ownership and operating procedures. It's not required to be publicly filed in Delaware. It can be in written form, oral, or even implied. Though it's not a requirement by the state, it's still advisable for business owners to have one to ensure internal control. This way, owners and employees can know what to expect from the company and vice versa. Also, if any conflict arises between members, the authorities refer to this document to outline the rights of every owner.
Below are some essential contents of an operating agreement:
- Organization: Who members are, when and where your business was created, and the ownership structure.
- Management and voting structure: Whether member-managed or manager-managed, the powers of managers and how they're appointed.
- Capital contributions: Which members support the LLC and their respective capital contributions. A comprehensive operating agreement also defines your future funding plans as you prepare for growth.
- Distributions: How profits and losses are shared between members.
- Membership changes: Process for adding, removing, or transferring ownership shares.
- Taxes: Who is responsible for filing taxes and when.
- Dissolution: When LLC may be dissolved.
5. Obtain EIN from IRS
Employer Identification Number (EIN) is also referred to as the Federal Tax Identification Number. It is a Social security number given to businesses by the Internal Revenue Service (IRS). It allows the IRS to identify and keep track of every business's tax status.
Business owners are required to have an EIN to:
- Open a business bank account
- Employ workers
- File state and federal taxes
IRS provides an EIN free of charge to a business owner after formation. You can apply online or by mail. Also, note that sole proprietorship owners with existing EINs are still required to get a new EIN when converting to an LLC.
6. Obtain Additional Licensing in Delaware
Delaware Business License
All businesses operating in Delaware must have a state business license. Delaware licensing fee costs $75 a year, and it expires on December 31st. You can then renew for one year or three years.
Using IncFile will cost you about $99, covering state, local, and federal licensing.
Also, depending on your profession or region, you may be required to obtain an additional business license(s). Therefore, to be compliant, ensure you check with the state’s licensing authorities for all the necessary licenses your business may require. You can apply for them yourself through the regulatory agency or have a professional service do it for you.
Use IncFile to Complete Formation Process (Easiest Way)
You can bypass these six steps by using a professional third-party service such as IncFile to complete the formation process. The Gold plan ($199) offers the following:
- It covers filing state fees
- Preparing and filing articles of organization
- Unlimited name searches
- Free registered agent service for the first year
- EIN business tax number
- IRS form 2553
- Operating Agreement
- Banking resolution
- Lifetime company alerts
- Business banking account
- Business tax consultation
- Online access dashboard
- Unlimited phone & email support
Obtain Delaware LLC Certificate of Status
It's also known as a Certificate of Good Standing. It signifies that your LLC was formed legally and has been properly maintained. This may be required when:
- Asking lenders or banks for money
- Forming your business as a foreign LLC in another state
- Obtaining business licenses or permits
Usually, it costs $50 for Short Form Certificate and $175 for Long Form Certificate.
Steps After Forming Delaware LLC
Below are the recommended steps to take after formation:
Open a Business Bank Account
As a business owner, it's crucial to separate your personal assets from business assets because:
- It keeps your personal assets safe from potential risks such as business lawsuits.
- It simplifies your accounting processes. Instead of analyzing a combined bank statement and highlighting the business transactions, you can quickly review a specific business bank statement for revenues and payments.
- It streamlines all your taxes. You can track all business expenses, report them, and claim your deductions.
Get a Business Credit Card
Here are three advantages of having a business credit card:
- It keeps your business expenses separate to avoid confusion during tax time.
- It builds your business credit score. This way, you can easily acquire a business loan in the future.
- You can monitor the expenditure for every department by providing separate cards.
Hire an Accountant
Hiring an accountant is essential for efficient financial management. With an accountant, you ensure:
- Timely and efficient reporting of taxes hence avoiding penalties or fines.
- Application of legal tax reduction strategies to make the most out of your return
- Effective bookkeeping to track losses and profits
Get Business Insurance
Below are three of the most common types:
- General Liability Insurance: A broad business insurance policy that protects businesses from lawsuits.
- Professional Liability Insurance: It protects professional service providers from potential claims of business errors such as malpractices.
- Workers Compensation Insurance: Covers employees in case of work-related injuries.
Comply With Delaware Tax Filing Requirements
LLCs must report income to IRS annually using the following forms:
- Form 1065 Partnership Return: For most multi-member L.L.C.s
- Form 1040 Schedule C: For most single-member L.L.C.s
Below are the types of taxes you might be required to register for:
- Sales tax: Delaware is one of the five states that does not impose sales tax on goods or services. Even so, some businesses are subject to Gross Receipts Tax. The tax rate depends on the type of business.
- Gross Receipts Tax: Based on the total gross revenue of all businesses operating in Delaware. The tax Rate varies by business type.
- State income tax: Most multi-member LLCs must file an informational tax return, Delaware Form 300-I.
- Employer Taxes: All businesses with employees must register for Unemployment Insurance Tax and Employee Withholding Tax.
- Delaware Franchise Tax: All LLCs in Delaware must pay an annual franchise tax of $300. You can do it online, by mail, or in person. The tax filing and payment are due by June 1st. Late filings will be charged a $200 penalty plus 1.5% interest for every month past the June 1st deadline.
This is only required if the federal government regulates your business. Some common LLCs that need to comply with this step include:
- Fishing and wildlife
- Firearms and ammunition
- TV broadcasting
- Nuclear Energy
An LLC is one of the most flexible and easy-to-form business structures a business owner can choose. Above are the legal procedures required to establish your LLC in Delaware. After formation, it's also vital to remain compliant, open a business account, get a business card, get insured, and hire an accountant to power your growing business. In case of difficulties, consider contacting a third-party service such as IncFile for a hassle-free formation process.