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How to Form an LLC in Delaware

Follow these steps to start an LLC in Delaware.

When deciding where to form your new business entity, you may be tempted to follow the crowd. Business-friendly laws and a business court of chancery make Delaware the most popular state for small business owners and seasoned entrepreneurs alike to form a legal entity.

Flexibility and limited personal liability to protect personal assets make limited liability companies (LLCs) the most popular business structure for many.

So if you too would like to settle your operations in Delaware, this guide will explain how to get your company registered and running in 7 steps.

Table of contents

  1. Step 1: Choose a name for your Delaware LLC
  2. Step 2: Designate a registered agent
  3. Step 3: File for articles of organization with Delaware Division of Corporations
  4. Step 4: Obtain an EIN (Employer Identification Number) from the IRS
  5. Step 5: Prepare an LLC operating agreement
  6. Step 6: Register with Delaware State Tax Authorities
  7. Step 7: Open a business bank account
  8. Taxes, costs, and fees in Delaware for LLC
  9. Business permits and licenses in Delaware
  10. Pros and cons of forming an LLC in Delaware
  11. Key takeaways
  12. Formation FAQs for an LLC in Delaware

Step 1: Choose a name for your Delaware LLC

The LLC name in Delaware must meet specific requirements to ensure that the public is not confused regarding the nature of your business.

For example, to inform the public what type of business entity you have chosen, the name must include the words “limited liability company” or an abbreviation such as “L.L.C.” or “LLC.”

The name may also contain the words such as:

  • Company
  • Association
  • Club
  • Foundation
  • Fund
  • Institute
  • Society
  • Union
  • Syndicate
  • Limited
  • Public benefit
  • Trust.

However, you must avoid any indications that may lead others to believe that your business is associated with the government or a bank.

Your name also should be distinguishable from the names of other businesses in Delaware, again to avoid confusion.

Once you have chosen a name that complies with Delaware’s requirements, check to see if it’s available on the Delaware Secretary of State Division of Corporation’s website.

If the name is available, you can reserve it for a $75 fee. The name reservation will be valid for 120 days. Remember, reserving a name does not mean that Delaware will accept the selected name as your legal LLC name. Delaware may still reject your choice after you file the Certificate of Formation (discussed below).

Your LLC may also request a “doing business as” (DBA) name, which can be different from your company’s legal name. To do so, your LLC will have to register the DBA company name in the location where your LLC does business. The cost is $25 per assumed name.

Step 2: Designate a registered agent

Delaware requires all new businesses to appoint a registered agent.

The purpose of a registered agent is to receive important mail from the state or legal documents such as accepting service of process in case a lawsuit is filed against your business.

A registered agent can be either a person at least 18 years old or a business entity with a physical address in Delaware.

You or your business can be your own registered agent if you feel comfortable listing a physical address in the state (P.O. boxes are not accepted). However, this can create privacy issues if a process server shows up at your place of business to serve the lawsuit.

For privacy reasons and because most Delaware LLCs do not have a physical address in the state, most people designate a third person or entity who resides in Delaware to act as their designated registered agent.

Many companies offer a registered agent service and will act as your designated registered agent for a fee. The Delaware Division of Corporations provides a list of recommended registered agent companies. The cost for a professional registered agent ranges from $50 to $300 annually.

Step 3: File for articles of organization with Delaware Division of Corporations

The “Certificate of Formation,” called “Articles of Organization” in other states, is a legal document that creates your new LLC.

The state application form is very straightforward and only requires you to provide the name of the LLC and the name and address of the registered agent. A person authorized by the LLC, called LLC organizer, must sign the document and submit it to the Delaware Division of Corporations.

Remember: You must contact a registered agent before filing the Certificate of Formation and obtain their permission to list their details on the state-submitted document.

There is no official state document that Delaware requires you to use. However, Delaware provides an example of Certificate of Formation on its website you can copy and submit.

State of Delaware certificate of formation of limited liability company

The filing fee for the Certificate of Formation is:

  • $90 for domestic LLCs
  • $200 for foreign LLCs registration/conversion
Note: A foreign LLC doesn’t file a Certificate of Formation. It files a Certificate of Registration of a Foreign Limited Liability Company.

Once filed, Delaware will return a copy stamped “filed” to you. You may (and should) request a certified copy of the document for $50.

The Certificate of Formation can be filed online. Or sent over by mail to:

Division of Corporations

John G. Townsend Building
401 Federal Street
Suite 4
Dover, DE 19901

If filing by mail, be sure to include a cover letter and a check for a state filing fee.

After Delaware receives your Certificate of Formation, it generally takes 7 to 10 days to process the document. If the above sounds too long, you can opt for the following expedited services for a fee:

  • One Hour Service – $1,000
  • Two Hour Service – $500
  • Same Day Service – ranges from $100 to $200 for filings
  • Next Day Service – $50 to $100 for filings

Step 4: Obtain an EIN (Employer Identification Number) from the IRS

Now that you have formed your new entity, you should obtain an employer identification number (“EIN”) from the Internal Revenue Service (IRS).

An EIN is necessary to hire employees and file employment tax returns. Some financial institutions may also ask for your EIN to open a business bank account. But this is not a legal requirement. For instance, if you report your federal taxes as a sole proprietorship, you can provide your social security number instead.

The application process is straightforward, and you may obtain an EIN online. Once you have completed the application, you will immediately be assigned a permanent number.

Step 5: Prepare an LLC operating agreement

An operating agreement is a document governing the rights and obligations of the LLC members. It’s like the by-laws of a corporation. It’s an internal contract LLC members typically, although not always, in writing and signed and dated upon forming the LLC.

Although an operating agreement is not necessary at the time of formation, Delaware law requires all LLCs to adopt an operating agreement eventually.

Whether the operating agreement is created before, after, or at the time of formation, it may be made effective upon formation or at some other time.

The operating agreement may be written, oral, or implied.

The Delaware Limited Liability Company Act will “fill in” the terms of the operating agreement where necessary. Where a Delaware LLC is formed without a written or oral operating agreement, in effect, the Delaware LLC Act will be the implied operating agreement.

You don’t have to file a copy of a written operating agreement with the state.

Delaware is one of the few states that does not require the LLC to maintain this as part of its books and records. A Delaware LLC is only required to keep a record of each member and manager’s last known business, residence, or mailing address.

However, a copy of a written operating agreement should be provided to all members and kept with company records.

Whether your LLC has one member or multiple members, a written operating agreement is strongly advised at or before the time of formation. One reason is to enact extra liability protection not provided by Delaware law.

For multi-member LLCs, a good reason to have an operating agreement is to prevent conflict among the LLC members.

A properly drafted operating agreement will address, at a minimum, the following member issues:

  • Member identity
  • Member interests
  • Member capital contributions.
  • Allocation of profit and losses among the members
  • Amount and timing of member distributions
  • Management responsibilities
  • Voting rights
  • Procedures for changing the LLC ownership structure
  •  Financial reporting responsibilities
  • LLC dissolution procedures

Step 6: Register with Delaware State Tax Authorities

An LLC doing business in Delaware must register with various government agencies, including the Division of Revenue.

Delaware Limited Liability Companies must pay an annual tax of $300 for the privilege to conduct business in Delaware. Further, an LLC doing business in Delaware may be subject to other business taxes such as gross receipts tax or employment taxes.

You can determine your tax liabilities and register for all applicable state tax licenses via the Delaware One-Stop business portal.

Step 7: Open a business bank account

Opening a business bank account is an essential first step in the operation of your new business.

If your company operates in several states, you may want to use a national bank such as Bank of America or Chase. If your business will be confined to Delaware and you live in this state, opt for a more affordable local bank.

Local banks usually offer more personal services and lower fees than national banks. Wilmington Trust has an excellent reputation in Delaware.

To open a business account, you will usually need to provide your Certificate of Formation and proof of your EIN from the IRS. You will also usually need to provide a sample signature to the bank.

Fees will vary depending on the amount of activity in your account and the amount of cash on deposit. Overall, plan to pay $0 to $35 monthly.

Delaware LLC costs, taxes, filing requirements, and fees

Let’s start with some good news.

Delaware does not require an LLC to file an annual report and pay any annual renewal fees respectively. Also, there’s no state sales tax.

But you’d have to settle other annual costs instead, such as:

Minimum annual franchise tax: $300

The annual franchise tax is charged for the privilege of operating in Delaware. The tax is due on June 1st each year. Late payments lead to penalties and can result in the loss of good standing with the state.

Individual income tax

LLC’s are “pass-through” business entities for federal income tax purposes and Delaware income tax purposes.

If the LLC does business in Delaware and has more than one member, it will be treated as a partnership. The LLC will file a partnership tax return, and each member will report their share of the LLC income or loss on their individual tax return.

If there is only one member in your LLC and that member is an individual, the LLC will be disregarded, and the income or loss will be reported for income tax purposes as if it were a sole proprietorship. Individual income tax rates in Delaware range from 0% to 6.6%.

Corporate income tax

If you elect to have your Delaware LLC taxed as a C-corporation, and you are required to obtain a Delaware business license, the LLC will be required to file a Delaware corporate tax return. If your LLC has net income, the corporate tax rate on net income in Delaware is 8.7%.

If the LLC generates a loss, it may be used to offset income from the previous two years or carried forward to offset income for the next twenty years.

Gross receipts tax

Delaware imposes a tax on gross receipts for goods sold or services provided instead of a sales and use tax. If you sell tangible property, Delaware also imposes a retail or wholesaler license and gross receipts tax.

The gross receipts tax rates range from 0.0945% to 1.9914%, depending on the business activity. If you have more than one business activity, the tax applies to each activity and must be reported separately.

These taxes are imposed on the seller and remitted monthly or quarterly, depending on the business activity, to the Delaware Division of Revenue.

State employment taxes

If you have employees on payroll in Delaware, you will be required to withhold taxes and remit them to the Delaware Division of Revenue.

The rates are calculated based on a complicated formula, depending on several factors, including the employee’s taxable income, exemption allowance, and the number of pay dates during the tax year.

Also, Delaware’s One Stop Business Registration and Licensing System can be used to register with the Division of Unemployment Insurance and the Office of Workers Compensation and pay respective dues.

Businesses will receive a temporary license upon successful completion of One Stop. If applicable, the Delaware Division of Unemployment Insurance will mail a letter of liability determination and a registration poster.

Delaware business permits and licenses

Any person or entity “conducting a trade or business” in Delaware is required to obtain a Delaware business license from the Delaware Division of Revenue.

You may be conducting a trade or business in Delaware if your company has a “substantial presence” in Delaware.

A full discussion of “substantial presence” is beyond the scope of this article. However, evidence of a substantial presence includes that your business:

  • owns, leases, or has the right to use or maintain real or personal property regularly in Delaware; or
  • sells goods or services to or from inside Delaware; or
  • has employees who live in, work from, or travel to Delaware.
Delaware business permits and licenses
Source: Delaware One Stop.

You can obtain a Delaware business license by applying online using One Stop or by mail using Form CRA. Once the Delaware Division of Revenue receives the application, it should take between 10 days and a month to receive your business license.

A temporary license will be provided immediately if you file online.

The Delaware business license expires on December 31st and must be renewed annually unless a business purchases a three-year license.

The fee for a business license varies but is generally $75 for the first location and $25 for each additional location.

If you are conducting a trade or business in Delaware, in addition to the Delaware business license, you may also be required to obtain other licenses and permits in Delaware, depending on the type of business you operate and the location.

For example, several professions require you to register with and obtain an occupational license from the Division of Professional Regulation, such as CPAs, lawyers, real estate brokers, and cosmetologists.

The fees for professional licenses vary depending on the license required. Further, the renewal requirements also vary depending on the license required. Also, the city of Dover requires businesses to apply for a city business license.

Also, all LLC’s who carry on a trade or business in Delaware are required to register with the Delaware Division of Corporations.

Other requirements for your LLC may include compliance with the requirements of local zoning laws and the Departments of Agriculture, Health, Natural Resources & Environmental Control, State, and Transportation.

Pros and cons of forming an LLC in Delaware

Whether or not you intend to do business in Delaware, it’s an excellent choice for new business formation. The laws and government infrastructure are business-friendly, and the court system is very pro-business.

Delaware LLC pros

  • Business-friendly laws and effective issue resolution
  • Online company management infrastructure
  • Better personal asset protection
  • No sales tax
  • No annual report
  • More privacy than other states
  • Overall taxpayer-friendly laws

Delaware LLC cons

  • Gross receipts tax
  • Minimum annual franchise tax of $300
  • Additional cost to maintain a registered agent if you do not live or maintain a business location in Delaware

Takeaways

  • Delaware has business-friendly laws and courts. Delaware appoints judges to its Court of Chancery with business backgrounds. These courts are able to resolve disputes more quickly and predictably. Delaware’s laws are written to give businesses maximum flexibility in structuring their business affairs, reflecting the state’s “freedom to contract” mentality.
  • Delaware’s government websites are well-organized and user-friendly, making compliance with regulatory laws easier for businesses.
  • If you are not doing business in Delaware, the only tax due is an annual minimum franchise tax.

Delaware LLC FAQs

Below are some of the most frequently asked questions (FAQs) about forming an LLC in Delaware.

How much does it cost to start an LLC in Delaware?

Starting a company in Delaware costs $90 for obtaining a Certificate of Formation from the state. That’s the key document you need to run your business. Unless you opt for a professional registered agent service or LLC formation service, that’s the only startup cost you’d incur.

This material is provided for informational purposes only. The provision of this material does not create an attorney-client relationship between Paul Donovan and/or Donovan Legal PLLC and the reader, and does not constitute legal advice. Legal advice must be tailored to the specific circumstances of each case, and the contents of this article are not a substitute for legal counsel. Do not take action in reliance on the contents of this material without seeking the advice of counsel.
Paul Donovan

Article by:

Paul Donovan

Attorney

Paul Donovan is an attorney, CPA, real estate developer, and broker with 25 years of experience advising real estate clients on the legal, tax, and financial aspects of real estate. Paul spent much of his career working for the “Big 4” advising Fortune 500 companies on complicated tax issues involved in the acquisition and disposition of real estate assets around the world.

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