How to Start an LLC in Delaware
It may be the second smallest state by area, but Delaware has a huge presence in the business world. As one of the most popular states for corporations, nearly two-thirds of Fortune 500 companies are incorporated in The First State. The same low tax burden and business-friendly culture that draws these organizations to Delaware can explain why it is a popular place to start an LLC. An LLC offers liability protection to its LLC owners, which means personal assets like a home or car are protected from business debts or lawsuits.
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The process of forming an LLC in Delaware is meant to be simple and attainable by any business owner with the right steps. By working with the Delaware Department of State and ensuring you are in compliance with all LLC requirements, you can easily have your own limited liability company formed quickly.
If you’re ready to set up a new business in Delaware, use this step-by-step guide to understand how small businesses are established and how these types of businesses are governed by state law.
Name your LLC
Have a name in mind? See if it’s already listed in the state’s business directory. If the name comes up in a search, it’s taken. If it doesn’t, it’s yours to claim.
Like all other states, Delaware requires that each business formed there has a unique name that is distinguishable from every other entity in the state. Because of the high volume of companies formed in Delaware, name availability may be scarce.
The State of Delaware website provides a business name search engine that makes it simple to find existing business names and determine if your chosen name is open for use. Any name that doesn’t appear in this listing will be an option for your LLC so long as it follows other naming conventions in the state. This means the name will need to include the phrase “limited liability company” or an abbreviation like LLC or L.L.C. to be usable.
There are a number of other rules that are made to ensure the business is not misleading the public. For example, names cannot imply the business is a government entity by using terms like Department or Treasury. Some words will only be allowed to be used if they are backed by proper licensing and professionals, like “attorney”.
Reserving a business name in Delaware
Until an LLC is formed with a name, that name will be considered available for public use. When you have something in mind, it is best to reserve it as soon as possible by filing for formation. If you are not ready to take this step, you can reserve the name for 120 days by submitting a Business Name Reservation online or in the mail. There is a $75 filing fee to do so.
Additional naming considerations
Delaware’s rules surrounding LLC names are the only legal guidelines you need to follow, but it’s worth thinking about what your name means for marketing your business. Choosing a name that accurately conveys what your business does is important, but it must also be something accessible to the public.
Keep in mind that people will likely find you online. This means that, when said aloud, your name should be easy to remember and to spell when typed into a search engine later. You should also be cognizant of what might come up in a search – is there a business in another state with the same name? Is the domain name or social media username you’d want to use available? These things can help make sure clients find you easily.
If you want to protect your business name on a wider scale, you can apply for a trademark through the United States Patent and Trademark Office. This would prevent others from using the same name, no matter what state the business is in.
You can reserve a business name in Delaware for 120 days on the state website.
Select a registered agent
Every LLC startup in Delaware is required to elect and name a registered agent as a part of the formation process. The role of the registered agent is to accept legal papers, like service of process, on behalf of the LLC and be held responsible for ensuring these communications are received. This can include tax paperwork or services of process in the event of a lawsuit.
If the business is physically located within Delaware, the LLC itself can be named as the registered agent. Any individual affiliated with the LLC, like the owner, can also be named as long as they have a physical address in Delaware (not a P.O. box). As long as they are over 18, anyone in the state can be named as long as they agree to be available during all normal business hours.
Another option is to use a registered agent service. This would be a business that is authorized to do business in Delaware. For a small fee, the service acts as a registered agent and meets all availability criteria so that an individual does not need to be onsite every day.
LLCs and corporations select registered agents, but sole proprietorships do not need to.
File Certificate of Formation
The official creation of an LLC happens when a Certificate of Formation of Limited Liability Company is filed with the Delaware Division of Corporations. This document provides all of the basic information about your company to the state so that they can verify it meets requirements and keep a record of each business.
The Certificate of Formation can be filed by mail, by fax, or online through the Delaware OneStop Portal. If filing by mail, the document must contain a cover sheet; if filing online, the document must be downloaded and signed before uploading.
In total, the Certificate of Formation is less than one page and requires only a few key pieces of information. You will need to include:
- The name of your LLC
- The name and mailing address of the registered agent
- The signature of an authorized person, either the organizer or someone authorized by the organizer
So long as the name is in compliance with all the above laws and each field is filled out, this will complete your LLC formation.
In other states, these formation documents are called Articles of Organization.
You can fill out and submit your LLC formation documents here.
There is a $90 filing fee associated with completing the Certificate of Formation. This is payable to the Delaware Department of State and will not be refunded for any reason.
Delaware processing time
For both online and paper filings, the expected processing time on a Certificate of Formation is about two weeks. This can be expedited for an additional fee.
Create an LLC operating agreement
An operating agreement is a legal document that lays out exactly how you intend to run a business entity. When it comes to Delaware LLCs, there is no requirement that any business have an operating agreement in place, so this step is technically optional. However, best practice is to always have an agreement in place – without one, conflict could lead the state to step in and use their default rules instead of thinking about the company’s best interest.
There are many attorneys who specialize in creating these documents, especially for large or complex organizations. You can also find free templates online to draft your own operating agreement. The contents are up to your discretion, though there are some topics commonly covered. These include:
- Profit and loss allocation, or the distributive share.
- Management structure, such as whether the LLC is manager-managed, member-managed, or a single-member LLC.
- Ownership percentages of each member, which may also include initial capital contributions.
- Procedures and rights for voting. This can include how votes are allocated as well as the actual logistics of holding a vote.
- Authorization for any members to act on behalf of the company.
- Buyout agreements and plans for what happens if a member leaves, dies, or otherwise cannot perform their duties.
- The process for adding a new member to the LLC and obtaining new funds.
- A plan for how to dissolve the LLC should it become necessary.
If needed, the operating agreement can be amended over time to reflect changes. But it is important to have one in place as you start a business so that conflicts can be easily resolved. Once it has been signed, this agreement can be kept on record for easy reference.
While Delaware has looser requirements than some other states, each LLC does need to keep up their good standing with the state. An LLC that has been newly formed is not quite ready to begin business operations until these basic tasks have been completed. Not only will this make your business compliant with state and federal laws, but it can also make your life easier on a daily basis.
Get your EIN
An EIN is a nine-digit identification number issued by the Internal Revenue Service to track business taxes at the federal level. Though it is called an Employer Identification Number, any business regardless of whether they have employees can obtain this tax ID. Businesses with any employees (or who pay excise taxes), though, are required to have an EIN. It is easy to obtain one through the IRS website at no cost.
The benefits of having an EIN span multiple areas of your business. Many banks will not allow accounts to be open for a business without an EIN, and having one lends credibility to an organization with any lender. Additionally, having an EIN prevents owners from having to provide a personal Social Security Number to vendors or clients, shielding them from identity fraud concerns.
Along with the EIN issued by the IRS, Delaware also assigns a state file number to each business. This can only be obtained after a federal EIN has been issued.
You can get your EIN by visiting the IRS website.
Get Delaware business licenses
There are a number of licenses that businesses may have to obtain in order to operate in Delaware.
- State licenses. Each business in Delaware, including LLCs, will need to obtain a general business license from the Delaware Department of Revenue. This license can be applied for online through Delaware OneStop and has a $75 application fee. Each year on December 31st, these licenses expire and must be renewed. Because there is no sales tax in Delaware, there is no seller’s permit issued by the state. Some professions may need to have additional licensing to perform their services.
- Local licenses. Throughout Delaware, local governments have the ability to require additional licenses and permits to operate in that location. For example, the City of Dover requires all businesses to have a separate city business license in addition to the state license, with different professions paying different fees. It is important to contact the city and county where your LLC will operate to determine if you need to have additional licenses.
- Federal licenses. Businesses that conduct activity regulated by the federal government, like agriculture or commercial fisheries, will also need to apply for federal licensing.
Open business bank accounts
If you have ever filed business taxes before, you know the accounting process can be tedious. One way to simplify this for yourself (or spend less on an accountant) is to have a dedicated business bank account that contains only income and expenses related to your LLC. This prevents you from needing to comb through a year’s worth of transactions and ensures you can report on totals properly.
Along with making this task easier, having a bank account for your LLC can actually offer critical asset protection for you. The protection of personal assets that an LLC affords owners is based on the assumption that the owner and the business are separate financial entities. If it is found that personal and business finances are mixed, the protection can be eroded and personal assets become entangled in the business.
A simple business checking account can help prevent this from occurring. You can also choose to open savings accounts and credit cards in the name of your LLC.
Review LLC tax rules in Delaware
One of the reasons Delaware is popular for businesses is that the state has a relatively low tax burden because of its lack of sales tax and relatively low state taxes. For tax purposes, LLCs in the state can operate as pass-through entities. Each member reports profit and loss on their personal tax returns, which avoids the state’s 8.7% corporate tax rate. In other words, the entrepreneur pays income tax, not the LLC.
However, Delaware does impose an annual tax on all LLCs in the state, sometimes called a franchise tax. This is a flat $300 due to the Department of State by June 1st of each year. When this is paid, it also acts as a record update for each LLC, which means there is no annual report required in Delaware.
An annual report is referred to as a Statement of Information in other states.
Get insurance for your LLC
While the structure of an LLC offers protection for its members’ personal assets, the business itself also needs coverage in case of a lawsuit or other serious obligations. This can take a number of forms, but the only requirement in Delaware is for workers’ compensation coverage. This insurance ensures that employees who are harmed or made ill by their job receive compensation, and any business with employees that is not an agricultural business must have it in the state of Delaware.
Outside of workers’ compensation, many businesses also choose to purchase general liability insurance. These plans are a way of defending against lawsuits related to bodily injury, property damage, and similar claims. Certain professions may also choose to have professional liability insurance, which extends to claims of malpractice and business errors.
Additional resources to help you set up a business in Delaware
Because of Delaware’s reputation as a business-friendly state, the Department of State and the Division of Corporations provide extensive online resources for those looking to start a business.
- A registration process flow chart to walk through each step of registration with the Department of Revenue based on your business.
- A listing of registered agents in Delaware who have already been approved to provide services.
- Comprehensive FAQs on business formation.
Do LLCs in Delaware pay taxes?
Delaware has no state sales tax, so any business in the state is able to benefit from these savings. Profits are typically taxed as personal income, rather than corporate income, and therefore subject to personal tax rates. There is a specific tax of $300 imposed on all LLCs each year. All normal federal taxes will apply to Delaware LLCs.
Is there a seller’s permit in Delaware?
A seller’s permit is a license in some states that allows a business to collect and pay sales tax. If you’re doing business as an LLC, there is no seller’s permit because there is no sales tax in Delaware.
Can I be my own registered agent in Delaware?
Any company that elects LLC as its business structure needs a registered agent. It can be the company owner or any individual who is over 18 and has a physical address in Delaware. The LLC itself can also act as its own registered agent as long as there is a physical address in Delaware where it does business.
Do Delaware LLCs need a business license?
All businesses in Delaware must have a general business license through the state, including any LLCs. Depending on the industry, professional licensing at the state or federal level can be necessary. Local governments may also have further requirements.
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