Delaware LLC - How to Get Started?
This article provides in-depth information regarding Delaware Limited Liability Company. In the first section, we will discuss the basic structure of LLC as it pertains to the state of Delaware. Secondly, we will highlight top 10 benefits of Delaware LLC. Lastly, we will explain how to register a Delaware LLC.
Overview of Delaware
It is the first of the thirteen British colonies to have signed the Declaration of Independence in 1776. Today it is home to many Fortune 500 companies listed on the New York Stock Exchange and the NASDAQ.
Delaware is also the home to many commercial companies that have chosen to establish their headquarters to exploit a long tradition of business hospitality, a highly efficient legal system, and a tested network of services for business promotion.
In fact, Delaware is the top-ranked US State in the ranking compiled by the American Chamber of Commerce for its capacity for economic attraction.
SECTION I - STRUCTURE OF DELAWARE LIMITED LIABILITY COMPANY
How can a foreign LLC operate in Delaware?
A foreign company LLC that intends to operate in Delaware can also use its own branch rather than constitute a separate company. In fact, some types of companies such as credit institutions tend use a branch as it allows the foreign company to keep an operational structure, which is more integrated with that of the parent company.
However, there are also certain disadvantages to operate a branch in the United States instead of a full-fledged U.S. company. First of all, the parent company will be directly responsible for the liabilities and operations of the branch according to local Delaware laws.
If judges in Delaware consider that the activities carried out by the parent company through its branch breach the local laws, the many advantages of LLC can be wiped put.
As a result, the parent company could be sued in a court in the United States. The assets of the parent company will not be protected under the Delaware law in the event of an unfavorable verdict.
Secondly, a foreign company operating through its own branch in the United States will be directly subjected to the tax jurisdiction of the United States and the states, in which it operates, will have to file a tax return and pay income tax generated in the States US. What part of the total income of the foreign company is attributable to its American activity is difficult to establish and the outcome of the tax agency evaluation is unpredictable. Accordingly, many foreign entities play it safe by registering their company in Delaware as a separate entity.
The company is legally in existence from the time of deposit of the Certificate of Incorporation with the state authorities. It means that you can officially carry out business activities once you have submitted the original article of incorporation irrespective of its status.
The registration is usually very quick within 24 or 48 hours in the State of Delaware.
Minimum Capital Requirements of LLC
In the US corporate system there is no obligation to subscribe and deposit minimum capital. In reality, a company’s capital has a more accounting function than a legal one.
When the shareholder of a Delaware company pays money into the account of that company or makes the payment on behalf of the latter, it will be possible to decide whether to consider such money as capital or as a loan to the company.
On the contrary, an LLC The must have an authorized capital corresponding to the maximum number of shares that the company is authorized to issue. The authorized capital can also consist of shares without nominal value, which allows for maximum flexibility.
Since there is no minimum capital requirement, members can decide from time to time whether a contribution is a form of a capital or a loan. The ratio of capital to loans in principle should not be more than one to five. It means that no more than five USD in loan for every dollar in capital. It should be noted, however, that the interest deriving from the loan is subject to a withholding tax whose minimum amount is set monthly by law.
Let Us Help You!
Let Us Help You!
Structure of the Limited Liability Company
- The LLC has a corporate structure in some respects similar to that of a corporation. The methods for setting up an LLC are also quite similar to those for a Corporation.
- Instead of shares, quotas are issued and there is only one level of administration known as managers instead of directors.
- The LLC is established by signing the deed of incorporation, the content of which varies according to the State of incorporation. The memorandum of association is sometimes referred to as the “Certificate of Formation “or “Articles of Organization.”
- The establishment of the LLC can be carried out by any of the partners or the owner. In fact, the LLC can have a single shareholder who can also be appointed after the establishment of the company.
- The LLC, although legally constituted from the moment the deed of incorporation is filed with the Secretary of State of Delaware, it can start operations with only a single member.
- The partners of an LLC, like the shareholders of a Corporation, are responsible for the debts contracted by the LLC within the maximum limit constituted by the capital of the company, even when there is a sole shareholder.
The Limited Liability Company in Delaware
Regarding the establishment of an LLC or a Corporation, the State of Delaware provides the most sophisticated and evolved corporate and tax legal system. Such a corporate system allows efficient management of these companies.
In recent years, the “Delaware limited liability company” (LLC) has become the preferred legal form of American and many international entrepreneurs. It combines the main advantages of the “corporation” and the “partnership “. The essential characteristic of the “corporation” is the limited responsibility of the owners; whereas of the “partnership” is the flexibility of the management and the fiscal transparency of the company and the shareholders.
The LLC is governed by the principles of contractual freedom rather than strict state legislation. According to the Delaware Limited Liability Company Act, almost all aspects of the management and organization of the company are variable and can be determined by an agreement between the members. The law contains standard provisions, but they apply only in the absence of specific agreement between the shareholders or in the event of failure to apply this agreement.
Tax regime in the USA
• The US tax regime is based on federal, state and local taxation.
• Federal taxes must therefore be supplemented by state taxes and those of some municipalities such as, for example, that of the city of New York.
• “Federal income taxes” are paid by anyone who produces income in the country.
• The “Federal corporate income tax ” ranges from 15% to 39% based on the total profits generated, plus a fixed portion which also varies based on the total sum. The “State” income taxes, on the other hand, differ from state to state, and “local taxes are present only in some municipalities.
• In general, any natural or legal person who produces, sells goods or services, or is a member of a Partnership or Limited Liability Company is subject to US tax jurisdiction.
• At the state level, the taxation on companies varies greatly from state to state and therefore any reductions for companies that intend to invest in a given state may vary.
• The corporate income tax is generally calculated as a percentage of profits but can also be based on the value of the property and on other forms of income generated by the company. It should also be noted that while the federal government does not charge any sales tax, the States and in some cases also the municipalities, require the payment of a tax on sales that take place in the State.
SECTION II - Top Benefits of Forming an LLC in Delaware
#1 Delaware Limited Liability Company provides a multi-layer protection to business owners
If you’re establishing a company in the state of Delaware, the state offers protection of your personal assets based on the legal structure of the company, and it also offers a “Charging Order” to protect creditors from taking over the organization. In fact, it will not be an overstatement to suggest that Delaware laws are tailor-made for protection of businesses in the state.
When you register a limited liability company, the business owner is automatically protected from the liabilities of creditors and other stakeholders as they cannot access your personal resources to pay off capital. In simple words, it means that no one can access your car, house, personal assets, and bank balance if you didn’t commit a fraud.
The only way someone will be able to take your capital is by getting a share from the profits and earnings of the company. If there is insufficient capital, then they need to prove that you have committed a fraud or a federal crime. In fact, proving that you have wrongfully embezzled cash from others is almost impossible if business owners try to be fair in their business dealings.
Similarly, the state authorities have passed a law which states that creditors and business partners cannot take over limited liability business just because one of the members owe cash to creditors and stakeholders. It means that you will remain in charge of your duties and keep your title in case someone sues you. Overall, if you play fair and try your best to abide by law, Delaware protects business owners who have made a mistake due to negligence and lack of business knowledge.
#2 Delaware Limited Liability Company laws are business-friendly
When you open a business in Delaware, you will have a piece of mind that the state has a history of protecting its businesses. Historically, local courts have always offered protection to businesses from liabilities and credit claims. Abiding by the law that provides “corporate shield” afforded by the Delaware Limited Liability Company Act, laws are written to strengthen limited liability companies.
In recent years, local courts have ruled in favor of small businesses and LLCs. There is a strong tendency of the state to ask for evidence of intentional wrongdoing from the plaintiff if someone sues a limited liability company. Perhaps, it is one of the main reasons why small businesses and single-member companies continue to regard Delaware as a safe haven for their investment.
#3 Delaware Limited Liability Company can operate from anywhere in the world
One of the distinct advantages of a Delaware Limited Liability Company is its ability to operate from around the world. For foreign entities, online businesses, and out-of-state businessmen, this makes it easier for everyone to register their LLC. The state doesn’t discriminate on the basis of nationality, which means that you can either register online or ask someone to register your company without visiting the United States.
There are a number of reputable professional companies that offer business registration services in Delaware at a fraction of the cost of what you may assume. Business owners just need to provide basic information about them enabling them to open a full-fledged business in the state of Delaware. Since there are no official requirements to open a bank account or maintain a physical office, it’s easy to register your business.
Please note that there few countries and individuals, which are on the official US terror list, cannot open a Delaware business. As for everyone else, there are no restrictions to open a U.S. based company. The only provision is to announce a registered agent in Delaware who can forward the official mail to the business owners. You can easily fulfill the requirements by paying a very low fee to a reputable professional company to represent you in Delaware.
# 4 Delaware honors operational agreement of the business owner and its partners
A limited liability company in Delaware can create its own operational agreement. If you have more than one member in the company, you and your partners can create an operational agreement regarding the role and duties of each partner. The rules and procedures defined in the written agreement will always be honored by the Delaware court.
It means you get better control of your company by creating your rules and regulations. If there is no operating agreement, then the state of Delaware will decide conflicts based on the existing law of the state. If you are the only member of a company, you can also create rules for potential employees and contractors to meet business requirements.
Unlike some of the other states, members are not required to attend an annual meeting and submit “minute of meetings” to the state authorities. You and your partners can attend the meetings according to individual schedules without any need to pass such information to authorities. The entire business structure and work-flow of a Delaware Limited Liability Company can be drafted according to your wish.
Overall, there is less administrative paperwork and requirements, which make creating and operating Delaware Limited Liability Company easier than many other U.S. states.
# 5 Managers are protected from any lawsuits
If you don’t have the necessary business experience, you can let someone else manage the company for you. The laws of the state are extremely friendly when it comes to company managers. All managers of an LLC are mostly exempt from fiduciary duties. By eliminating burden of fiduciary duty, the state encourages managers to make important decisions that are beneficial to stakeholders and minority investors.
A fiduciary responsibility prohibits managers to act in the best interest of investors as they are afraid to be held liable for certain actions. In some U.S. states, there are certain restrictions on how managers can act and how much capital they can put at stake. In Delaware, authorities offer flexible terms to managers that allow them to run businesses according to their full business capabilities. They are mostly not held liable for their actions or loss unless it can be proved that they have taken actions in a bad faith and against the will of the investors. Even if there is a loss, managers are not accountable for anything that is not entirely prohibited or that is not fair to the other members.
# 6 No Corporate Taxes for LLC and No Business Tax Loopholes
One of the major reasons for the success of Delaware corporate environment is its tax structure, which prohibits anyone to pay tax if they did not conduct any business. Not surprisingly, majority of the Fortune 500 companies maintain their headquarters in Delaware due to its tax environment.
Besides getting tax provisions, there are also a lot of benefits for LLC that want to be taxed as S-corporation or C-corporation. For instance, LLC can save thousands of dollars by using the tax structure of S-Corporation. The income of such a business can be divided between self employment and S-dividend income. Splitting such taxes also saves corporations on Medicaid and social security taxes.
The flexible tax structure proves useful for limited liability companies as they expand their business in the future or establish branch network in other U.S. States.
# 7 Speedy Registrations and Business Fillings
The Delaware Secretary of State office is open for extended hours due to the influx of business interest. While there are a lot of state where you will require a week to file papers, get answers, and register business, Delaware is different as it can speed up the process according to the number of filings.
For instance, you can file a business-oriented request after office hours and get your answer within one hour. In fact, this is unheard of in the U.S. business environment. For company registrations, Delaware authorities offer complete flexibility as you can fill company papers online; send it through a registered mail; get everything done on the phone; or pass information using an email. Everything can be done in a matter of hours delivering productivity to business owners.
In Delaware, business owners are in charge of their work. They’re the Boss who tells the state how they want to manage their business. If you want complete flexibility and peace-of-mind, look no further than establishing a Delaware Limited Liability Company …
# 8 You can own and manage any type of business in Delaware
Regardless of your business interest, Delaware offers extremely flexible operational structure to business owners. As a business owner, the state makes it easier for anyone to operate a small business or multi-million dollar LLC. In fact, a number of business owners hold a passive stake in Delaware where they use their LLC to hold real estate or an investment property.
Likewise, the state has special provisions for trusts, non-profits, and certain organizations. These companies can not only take massive tax advantages but they can also expand their businesses to other states and countries without restrictions imposed by other U.S. states. Accordingly, the most common use of establishing an LLC in Delaware includes operating a service-oriented business; holding a real estate; holding a business property; holding tangible assets such as airplane, yacht, and patents.
# 9 Delaware Courts are One-of-a-Kind where business decisions take only weeks, not years
Delaware has a separate court, which decides business dispute. Known as the Court of Chancery, it appoints business-oriented judges who have special knowledge of business cases. Their knowledge helps them solve corporate disputes effectively without delaying the entire process. Unlike other courts, there is no jury trial because the judgment of the court is considered a final verdict.
Due to the unique nature of Court of Chancery, business decisions are taken within a matter of months. Most cases are decided in less than three or four months. Decisions for each verdict may consist of more than 100 papers, which reflect the seriousness of the judges. There are no arbitrary outcomes as detailed decisions contain vital information and reasons for the verdict.
If a business is not satisfied with the decision, they can matters to the Supreme Court of Delaware. Just like the Court of Chancery, the Supreme Court puts special emphasis on business cases making it easier for both the parties to get a final verdict within few months. In fact, there is also a provision to expedite the entire process.
# 10 Delaware has most pro-business laws compared to other U.S. States
Delaware is famous for providing an unbiased non-political decision to business cases. The pro-business environment is Delaware is reflected in the history of judicial proceedings. Since the state handles hundreds of business-related cases every month, the judicial process has evolved into a strong unit, which can decide cases based on a pervious verdict.
It is often easier for the companies to predict the outcome because most cases are decided based on similar provisions found in past cases. As such, judges can relate their verdicts and decisions to a history of fair business judgments. The entire process ensures that everyone can trace the decision to a reasonable judgment. Overall, business trials in Delaware are known to be based on reason and logic.
SECTION III - HOW TO REGISTER LLC DELAWARE?
To register a company, you must fill certificate of formation and submit it to the state authorities. Once you get a reply from the state, your business will be officially registered. Here are important guidelines on how you may fill the certificate. Please note that the form is mostly self-explanatory, but the following particulars are to guide you if you require help in filing the content.
Principal Mailing and Street Address
In this field, you must disclose the physical address of your office in the state of Delaware. For businesses that have a brick-and-mortar store or a physical storefront in Delaware, it’s easy to fill this form. On the other hand, if you are a resident of Delaware, you may also designate your home address as the office address. Most businessmen do not name their home address as an office address because these business filings are in the public domain, which means that your address will be accessible to marketers. In fact, no one wants to get tons of spam mails every day at their office address.
One of the easiest methods to solve this issue is to use a virtual office address or the address provided by a registered agent. There are many reputable professional companies offering office address and registered agent services. For a low cost, you can have a high-street reputable address that can serve as your official office address in Delaware.
Such methods are also extremely popular with online businesses, franchise, and foreign entities, which can get an office address at a reasonable cost. Since professional companies are registered with the Department of State, everything is done in under the most professional and legal framework. In addition, new businesses don’t need to reveal their private home address to spammers and advertising companies.
Address of a Registered Agent
A registered agent is someone with a physical address in Delaware who can be contacted by the state to deliver legal letters and official documents. An LLC registered in Delaware must have a registered agent who can receive legal documents from the state. According to the law of Delaware, a single-member company can be its own registered agent because there is only one member who can take care of the legal communications.
For online businesses, multi-member company, and foreign entity, it is better to appoint a professional registered agent as the agent will receive and forward all the important documents to the company. Even if you are a single-member LLC or multi-member LLC with a physical address in Delaware, appointing an agent can benefit in a lot of ways.
For instance, a registered agent is qualified to receive legal documents for a variety of its clients, which means that they are trained to deliver legal documents responsibly to everyone. Irrespective of the day of the year, these registered agents make sure that the important documents are delivered to the right recipient at the right time.
The Management Structure
Most limited liability companies are either controlled by the members or by a manager appointed by the owner. If you are the only person who will be running a business, then the company is considered to be run by a member. Similarly, if there is more than one stakeholder in a company, then the LLC is said to be run by its members. In both these cases, your company is a member-managed company.
On the other hand, if someone appoints a manager to run the company, then the company is said to be run by a manager. There are several instances in which multiple members of the company may appoint a manager to run the show. Such business structures are common when members believe that a certain manager or managers have the unique skills required to run the company. A simple example would be a general manager of a hotel. Usually, hospitality industry has a general manager who takes care of all the hotel affairs.
In this section, you just need to let authorities know the type of management structure. Accordingly, the management structure will be either member-managed or member-managed.
This is an optional field, which you may skip; however, we recommend that you should put a generic email address to receive important notification from the state department. Besides sending a letter to the registered agent, they may send you updates and necessary documents on this email address.
If you decide to provide authorities with an email address, make sure it is not an email that you use frequently. Avoid giving your official email address or personal email address because such an email is in the public domain, which is often used by marketers. As a result, you don’t want your important inbox to be filled with spam and advertising emails.
Instead of using a popular email address, create a new email address that you can check occasionally to review any important updates from the state office. Usually, your important documents will always be mailed at your registered agent address but you can also get updates and information on such an email.
Address & Delaware LLC Cost
You are required to fill in the name and address of the person filing the article of organization. Think of this section as a kind of official signature. If there is more than one person filing the form, then they should also include their name and the address.
Once done, the article of organization is ready for the submission. The last part is to pay the filing fees. You can pay the $90 fee using any major credit card or you may also use a pre-paid account. Before submitting the official document, make sure to make a copy for your records.
Select a name for Delaware LLC (Delaware LLC Lookup)
Based on your preference, anyone can register a company if the name of the new company doesn’t match other companies already registered in the state. To check name availability, you may use the Delaware LLC Search Corporations Database.
If you are still thinking about the name, you may reserve a name for your company by paying only $75 for name reservation. Once reserved, a potential business owner has three months to register the name before it is released back in the public domain.
Once you are sure that you have a unique company name, it’s time to fill articles of organization.
Prepare Certificate of Formation
Certificate of Formation is a legal form that contains information about the new business. After preparing the Certificate of Formation, you will get a certificate from the State of Delaware recognizing you as a legal limited liability company.
To make the process easier, Delaware provides a very simple form that is easy to understand. The cost of registering an LLC in Delaware is $90, which can be paid by credit card or by a cheque.
Certificate of Formation asks you to fill important information about your company and its structure. Most questions are easy to answer as you only need to write your company name, the address of the company, and number of members.
If your LLC has more than one person, you will also need to write the name of the person, their title, and address. Depending on how much information you want to provide, some LLCs also provide details about the role of each member which also includes the distribution of profits. Overall, preparing Certificate of Formation is not difficult.
Despite the ease of process, a lot of business owner hire a professional to help them fill the form. By paying a few extra dollars, an agent can streamline your filing enabling you to concentrate on more important matters. Another advantage of hiring a professional company is the time savings because you don’t want to get your papers back after a week if there is a slight typo or wrong information in the filing.
After preparing the article or organization, you can send it to the State of Delaware Corporations. If you have filed the paperwork online, it will take approximately 48 hours to process it. If you are mailing the papers, it can take anywhere from a week to ten days to get a positive reply.
Appoint a Registered Representative
To establish a LLC, everybody must designate a registered representative.
In line with the laws of Delaware, a registered agent could be any responsible person or it may also be a professional service firm. If you wish to name a person as a registered representative, the person must have a physical address in Delaware.
There are a lot of professional service providers offering registered agent service for an inexpensive price. State authorities demand that these private businesses meet certain standards to provide such services. As such, the benefit of a professional service provider is its capacity to provide round-the-clock service to customers allowing them to get their private documents and relevant official papers in a timely way.
For several internet companies and people residing in other U.S. States, a private business offering registered broker service is quite beneficial. As a specialist provider, these businesses provide many different services which include registration of Delaware LLC, office address, telephone calling, and business process management.
Draft an Operating Agreement
Preparing a working agreement isn’t mandatory. It is possible to bypass this procedure in case you are a single-member firm. A working agreement outlines the responsibilities and obligations of every member in a business.
Without an operational arrangement, businesses that have more than one member may get into operational difficulties at a later state. The working agreement is also essential for multi-member organizations as it can work as a proof if a dispute happens. Since it also highlights obligations of every member, members take their responsibilities more seriously since there is an official document to hold them accountable for their responsibilities.
If your business has just a single business operator, preparing a working arrangement can also help in dealing with banks and other financial institutions that need to understand your own role. In reality, lots of banks, financial institutions, and insurance companies ask that you submit a working arrangement before initiating any type of dialogue.
There are lots of internet sites where you are able to download these types of official forms. Since there’s no uniform law, you may use the internet samples to style your operating agreement according to the structure of your limited liability company. If it sounds a time-consuming procedure, get the support of a professional representative since these agents can write a working agreement in line with the operational requirements of the company.
Get EIN, Employee Registration Number
According to local rules, single-member LLC that has one or more than one employee must register for EIN, worker identification number. It’s simple to get EIN by submitting a brief form, on line. When the form is filed, you’ll get the EIN immediately.
EIN is required for a variety reasons that includes paying taxes and opening up a bank account. Free of cost, the EIN could be obtained from IRS site by filling Form SS-4. If you’re the sole owner of an organization, EIN remains important as you may need it to open a business account or pay certain taxes.
Let Us Help You!
Let Us Help You!
Get Permits and License for LLC Delaware
Apart from EIN, certain companies also need permits and licenses to fulfill their legal obligations. For example, health care, property, and construction businesses need special licenses to operate. You can’t start our company without getting these permits and license.
If your company is involved with promoting tobacco products, electronic cigarette goods, or products containing nicotine, you’ll need to get the license. The company license can be obtained by contacting your local licensing authority. If you aren’t sure, speak to a professional representative who will be able to help you to get permits and licenses, if needed.
Open a Bank Account
After establishing an LLC, make sure to get a business account. It’s not wise to combine your company and individual accounts since it’ll be damaging to the security of your personal assets. As soon as you’ve registered the organization and appointed someone as your own registered agent, it is time to go to the bank.
To register a business account, you will need to take the article of organization, employer identification number, and an operational arrangement. Call the bank officials in advance letting them know that you want to open an official business account so that they can get someone who can answer our business-related questions.
Get Business Insurance
Delaware has business-friendly laws that favor LLC and small businesses but you need to cover yourself in case of mishap. There is a variety of business insurance that you may get in Delaware. Business insurance will help your company reduce risks and focus on increasing sales.
For instance, most small businesses get general liability insurance for their companies, which help them protect against the lawsuit. While personal assets of the owners of a limited liability company are protected by law, it makes sense to protect your profits generated from the company.
General liability insurance will make sure that the profits generated from the business are not lost to a legal process; therefore, many businesses in Delaware also opt for general liability insurance. Similarly, if you are an accountant or a consultant, you may prefer a professional insurance as it will protect you from claims of malpractice.
Interestingly, if you have more than five workers in a company, the state of Delaware requires every business to have a worker’s compensation insurance. As part of the legal framework, owners and members of a business are also counted as workers. The workers compensation insurance will cover you in case of an illness, injury, or job-related death of a worker.
You can get these insurance from the website of private insurance providers. If you’re not sure of the type of insurance, it is better to ask a professional agent or the local chamber of commerce for further details.
Overall Delaware is a great place to start a business because it ranks among the top five states that have healthy economies. According to Inc. Magazine, the state owes it development to oil and gas resources. It has a lot of cash to cover short-term spending and its yearly revenues exceed spending. Low levels of debt and relatively low levels of pension benefits are other things that are keeping Delaware on top of the list of healthy economies.
For new businesses it means that they will not face any unexpected tax and legal hazards in the near future. If you need further information on registering your business in Delaware, talk to a professional company to give you a business package that can assist you in running a successful LLC
Hopefully, this article has offered you an overview of how you can register and operate your business in the initial days. If you feel overwhelmed by the information, please note that it usually takes some time for new business owners to get used to the requirements. Once settled, it will be easier to fulfill potential business needs. It is also highly recommended that you consult a reputable professional agent to help you with your business tasks. While a professional agent may charge you a couple of hundred dollars to take care of the entire process, it is usually a great value for your money. By outsourcing important business tasks, you can concentrate on business issues instead of spending a huge capital to pay the lawyer fees.
To keep it simple, start by completing one task at a time. At this point, you should only focus on registering your business. Once you get the registration papers and the number from the state authorities, it’s time to think about other matters such as getting an employer identification number, opening a bank account, and getting licenses, if required. If you follow this guide one step at a time, you will definitely reach your goals earlier than your expectations.