Should you start an LLC in Delaware?

Introduction

If you don’t reside in Delaware or conduct business there and have heard that you should register an LLC there, let me save you a lot of money and time by telling you that you shouldn’t. The downsides of creating a Delaware LLC significantly exceed any benefits you may have heard about.

Delaware is home to a large number of businesses. And there’s a reason why this state is so popular for forming businesses. However, there are a number of drawbacks to forming a business in Delaware.

These are some of the advantages and disadvantages to think about before selecting whether or not to register your business in Delaware.

Advantages of starting an LLC in Delaware

According to the Delaware Division of Corporations, 67.8% of Fortune 500 businesses are formed in Delaware, and the state has 1.5 million registered corporations.

The state of Delaware has worked hard to establish itself as a desirable location for business formation. The following are some of the benefits of incorporating here:

Tax benefits

Delaware does not levy an income tax on corporations that are registered in the state but do not do business there. Shareholders who do not live in Delaware do not have to pay Delaware taxes on their shares. Delaware is frequently considered to as a tax shelter as a result of these factors.

Corporate court is available

Delaware has a Court of Chancery that solely deals with business matters. The judges are business law experts, and the court’s conclusions are more predictable than those in other states.

Quick filing process

Delaware is devoted to being a corporation-friendly state, therefore your file will be processed the same day.

Protected privacy

The identities of your directors and officers do not need to be disclosed to the state when you file in Delaware. This ensures anonymity.

Slimmed-down corporate structure

Small businesses choose Delaware because it permits just one individual to serve as an officer, director, and shareholder.

Disadvantages of starting an LLC in Delaware

While Delaware has certain distinct advantages, it also has some substantial disadvantages. It should be mentioned that in almost all cases, it is more cost effective to register your business in your home state. There are a few more things to think about:

No real tax savings for small businesses

Although Delaware does not tax firms that are formed in the state but do not conduct business there, your home state will, so you will be taxed.

Expensive filing

The filing costs in Delaware are much greater than those in other states.

You’ll have to pay a franchise tax

Although your corporation will not be subject to income tax in Delaware, it will be subject to a franchise tax depending on the value of its shares. For small enterprises, this is usually low, but it will rise as the number of shares and the value of your stock rise. In your home state, you may also be required to pay a franchise tax.

You must adhere to the laws of your own state

Even if you incorporate in Delaware, you must still comply with the filing and licensing requirements of your home state in order to do business there. In both places, you must also file yearly reports. It takes twice as long and costs twice as much to achieve this.

Delaware registered agent is required

When you file, you’ll need to supply the name of your Delaware registered agent, who is a person or corporation in the state who may receive legal files on your behalf. If you pay someone to do it for you, it will be an additional cost to your company.

Legal disputes require travel

Because any legal conflicts affecting your firm must be heard in Delaware, you’ll have to fly to Delaware to resolve them. You’ll also need to hire a Delaware attorney instead of the one you employ in your home state to handle the case.

Obtaining distinct identifying numbers is difficult

Another disadvantage of the series LLC structure is that obtaining a different identification number is fairly tough. For federal tax reasons, the different series inside the LLC may be unable to get a unique identification number.

Conclusion

The benefit of forming a Series LLC in Delaware is exceptional. Everything, however, is a two-edged sword. Series LLC, on the other hand, has its own drawbacks.

Outside of Delaware, the series LLC structure is not frequently accepted. In truth, this company structure has yet to be put to the test in a court of law. As a result, most courts outside of Delaware are unlikely to pay attention to the different assets, obligations, and records of each series. The umbrella LLC will be viewed as the principal corporation responsible for everything in this scenario.

While Delaware does provide incentives to businesses that incorporate there, it is largely huge organizations that profit the most. Before deciding, small firms should carefully balance the higher costs vs the benefits of incorporating in the state.

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