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Delaware may be a small state, but its offerings for new business owners are mighty. The state is located close to a number of East Coast metropolitan areas, including Philadelphia, Washington, D.C., and New York. And its tax system is highly favorable toward entrepreneurs, with no sales tax and lower state taxes overall—more than one million entities call the state their legal home because of its low taxes. This guide will walk you through how to start an LLC in Delaware.
How to Start an LLC in Delaware
What is an LLC?
Limited liability companies (LLC) are a type of business entity common to the US. LLCs can be formed by one or more owners, which are known as “members.” LLCs with multiple owners are called multi-member LLCs; with one owner, single-member LLCs. The main structural advantage of running an LLC is that its members are protected from most liability and debts incurred by the company. Members are not held personally responsible for claims brought against the business.
The federal government’s tax treatment of LLCs is also a major advantage of this structure type. LLCs are considered “pass-through” entities (like sole proprietorships or partnerships), so the income they generate is taxed a single time at each member’s personal income level. This differentiates from how the federal government treats corporations, which pay taxes both on business income and profits distributed personally to shareholders.
Is an LLC right for you?
Whether opting to form an LLC in Delaware or some other form of business entity, the decision will ultimately depend on your needs as a small business owner. The LLC may be the right format for you if looking to limit the business’s liability exposure and tax obligations. However, if you’re looking to fund the business by issuing shares, you’ll need to make at least two additional considerations:
- Is the plan to issue a small number of shares to a limited class of shareholders? If so, you may choose to form your LLC as an S corporation. As an S corp, you can still operate as an LLC and issue shares to no more than 100 US citizen shareholders as common stock.
- Does the company wish to issue more than 100 shares, or issue to foreign entities and/or in the form of preferred stock? In this case, you should not form the business as an LLC, as federal tax laws do not allow for it.
1. Choose an idea for your LLC
Before anything else, formulate a workable business idea for your LLC. Will you offer a product, a service, or some combination of both? Will you sell direct-to-consumer or business-to-business (B2B)? Other considerations you will want to make to further hone your business idea include:
2. Name your Delaware LLC
One of the most important decisions a Delaware LLC owner makes is choosing your LLC name. There are several guidelines to be aware of when naming an LLC in Delaware:
- The LLC’s name must be distinguishable from those of any existing businesses registered with the state, whether they are other LLCs, corporations, nonprofits, or partnerships. The availability of a proposed business name can be checked via the Delaware Secretary of State’s Division of Corporations entity name search.
- LLC names must include the words “Limited Liability Company” or one of its two abbreviations: LLC or L.L.C.
- The LLC name may not contain words that might confuse it with a legitimate government agency such as the FBI or Justice Department.
- For certain types of businesses, some words in the LLC’s name may require specific documentation or licenses such as “attorneys at law” or “credit union,” for example.
3. Create a business plan
Well-prepared small businesses rely on thorough business plans. Delaware LLCs are no exception to that rule. A viable business plan will include your LLC’s name and a description of how it functions. Other components include a detailed market analysis, outline of the organizational structure, descriptions of any products or services marketed, target customer profiles, and plans for marketing, logistics, and finances.
4. Get a federal employer identification number (EIN)
For tax purposes, each Delaware LLC must be assigned an federal employer identification number (EIN). You can apply for an EIN, which identifies your company to tax authorities both at the state and federal levels, for free through the IRS website.
5. File your Delaware LLC Certification of Formation
After picking a unique name for your LLC, it’s time to register it with the Secretary of State’s office, which oversees the authorization of all businesses in Delaware. Registering in the state requires that you file a Certificate of Formation with the Delaware Division of Corporations. You can do this online or through postal mail. Information that will be requested in the filing includes:
- Your LLC’s name
- The name and address of your LLC’s registered agent
- The street address of your LLC’s principal place of business
- The signature of a person so-authorized to file the certificate with the state (for LLCs, that will likely be one of your members or a member-hired manager)
Once you’ve filed and paid the $90 filing fee, the Division of Corporations will review the filing, and if approved, your LLC will be a fully formed legal entity in the eyes of the state.
6. Choose a registered agent in Delaware
As is the case in every other state, an LLC in Delaware must appoint a registered agent to receive legal documents and service of process on the business’s behalf. Delaware registered agents can be a person, such as the owner or an employee of the LLC, or a company offering registered agent services. If appointing a company, it must meet the following two criteria:
- The registered agent service must have an address in Delaware
- The agent must be on-site and available to accept documents during regular business hours
7. Obtain business licenses and permits
Many LLCs formed in Delaware take advantage of its favorable tax code but do not actually do business in the state. If your LLC is one of these businesses, you are not required to obtain a business license or register with the Department of Revenue. If your LLC will conduct business in-state, you can obtain your business license through Delaware’s One Stop business licensing and registration service or complete and submit a Delaware Combined Registration Application (CRA) form. A $50 application fee is required to receive your Delaware business license, if needed.
8. Understand Delaware state tax requirements
When it comes to federal taxes, Delaware LLCs that choose to be taxed as pass-through business entities are only taxed at the members’ personal income levels. LLCs that elect to be recognized as S corporations, thereby allowing them to distribute a limited number of shares, will pay taxes on corporate income as well. For tax purposes, Delaware treats LLCs the same way as the federal government.
What makes Delaware unique is its lack of state and local sales tax. However, if doing business in Delaware, the state does impose a gross receipts tax on businesses selling goods or services in the state—basically, a tax on the total receipts derived from a business’s sales. These gross receipts tax rates can range from about 0.09% to 1.99% depending on the nature of the business. Also, for LLCs with employees, Delaware requires that they withhold and pay the state income tax on wages. For wages up to $3,600, withholding taxes must be paid quarterly; between $3,600.01 and $20,000, they must be paid monthly; and for wages above $20,000, they must be paid twice a week.
Although LLCs don’t have to file an annual report in Delaware and don’t have to pay an annual franchise tax, they do have to pay a flat annual tax of $300. There are special taxes Delaware LLCs may have to pay as well, depending on their lines of business:
- Businesses that sell alcoholic beverages
- Businesses that sell cigarettes or other tobacco products
- Hotels and motels
- Businesses that sell petroleum products
9. Prepare an LLC operating agreement
An operating agreement is a legal document that outlines the ownership, organizational structure, and operating procedures of your LLC. LLCs in Delaware are not required to have operating agreements filed or even prepared internally. But for the sake of organization and goal setting, it can still be beneficial to have one on hand. Below are the types of details included in an operating agreement:
- How ownership rights are distributed between members. Specifies the ownership percentages within the company.
- Members’ roles and responsibilities. Address whether the company will be a member-managed or manager-managed LLC.
- Exiting procedures. Covers the procedures for when a member wants to leave the LLC, or for when the LLC winds down business operations.
- Share distribution. Includes information on the distribution of shares if an LLC opts to form as an S corporation.
10. Examine business insurance options in Delaware
Purchasing insurance for your Delaware LLC is important to managing business risk, freeing you from stress to better focus on growing the company. Commonly favored insurance plans for businesses in Delaware include:
- General liability insurance. A policy that, in general, protects your business from lawsuits that could result from, say, a customer’s slip-and-fall accident on the shop floor.
- Professional liability insurance. Insurance for LLCs that provide professional services requiring a higher duty of care, such as law firms. This insurance usually protects against malpractice claims.
- Workers’ compensation insurance. A kind of policy that covers employees’ injuries and illnesses that happen on the job. Delaware LLCs are required to purchase this type of insurance coverage by law.
- Business income insurance. If your LLC can’t operate for a time due to a covered loss, this coverage can replace some or all of your lost income during that period.
11. Understand financial considerations
Aside from buying insurance for your Delaware LLC, you may need to make additional financial investments to get the business off the ground. This might include rent toward a lease on a brick-and-mortar retail space, paying for a professionally designed website and social-media services, and purchasing equipment and software. In addition to paying employees, you may wish to hire contractors and other professionals to support business operations, like lawyers and accountants. There are resources available to help entrepreneurs raise startup funding to assist with these costs.
12. Market your LLC
Finally, after all the administrative considerations are met, it’s time to market your LLC. A solid marketing plan sets the foundation for your Delaware small business, with a goal of building brand awareness and future growth. Key parts of a workable marketing plan include:
- Market research. You need to intimately understand your target customer before you can effectively market your products or services. Steps in market research include identifying and analyzing your target customer, assessing the competitive landscape, and researching industry trends.
- Advertising. Get the word out about your LLC through paid advertising. You can do this yourself, or hire an agency. This can take the form of print and television ads, billboards, and ads accompanying webpages, such as banners or pop-ups.
- Social media. A strong social media presence is not optional for small businesses in this day and age. A Delaware LLC that maintains an active presence on a variety of platforms—Facebook, Instagram, and YouTube, to name a few—has a greater opportunity to reach more customers and increase growth potential.
- Public relations. Paid media will only get you so far. Developing organic relationships with media outlets, both within Delaware and across the country, can help increase authentic brand visibility.
- Business development. Build genuine relationships with your customers to turn them into repeat customers who can spread the word about your business organically to friends, family, and colleagues. Paid media will only get you so far. Developing organic relationships with media outlets, both within Delaware and across the country, can help increase authentic brand visibility.
- Business development. Build genuine relationships with your customers to turn them into repeat customers who can spread the word about your business organically to friends, family, and colleagues.
How to start an LLC in Delaware FAQ
How much does LLC formation cost in Delaware?
At a minimum, it will cost $90 to set up your LLC in Delaware, which accounts for formation filing fees. If you intend to do business in Delaware, and not just incorporate there, there is an additional $50 for a business license. Finally, expect to pay an annual $300 LLC state tax.
Do you need a registered agent?
Your LLC must appoint a registered agent in Delaware—either an individual or an agency with principal business address in the state, or an individual or agency with one or more business locations in the state.
How do state taxes work in Delaware?
In addition to your annual flat tax of $300, you will have to pay a tax on gross receipts for all sales of goods and services by your Delaware LLC.