Delaware is often considered one of the best states for creating an LLC, due to its strong privacy protection, business-friendly court system and below average personal income tax rates.
But does forming an LLC in Delaware make sense if your business operations take place elsewhere? The answer depends on the type of venture that you conduct.
Asset Protection
LLCs can be invaluable tools in many instances. They can protect business owners from liability; act as estate planning vehicles; and hold assets subject to creditors’ claims.
State laws regarding asset protection for LLCs differ significantly, especially regarding charging orders against them. Some states offer comparable asset protection as corporations while others can pierce through corporate veil liability (holding shareholders personally liable for actions taken by their LLC or corporation).
If a business owner’s home state fails to offer adequate asset protection, forming their entity in another asset protection-friendly state may provide more comprehensive asset protection than what their current home state can. While this may incur two formation fees and registration costs, its benefits typically outweigh these expenses.
Liability Protection
One of the key advantages of forming an LLC in Delaware is providing business owners with liability protection from monetary judgments, since any successful lawsuits against your LLC would only impact its assets instead of your personal ones.
This is especially important for businesses that own real estate or other types of assets, as this helps shield the owner’s personal assets from being exposed. Furthermore, protecting intellectual property assets helps prevent lawsuits from severely damaging a company.
Delaware boasts an expansive case law library to assist individuals and corporations when deciding if it is in their best interest to fight or settle corporate lawsuits, leading them to resolution much quicker than expected, often within weeks rather than months or years.
Delaware offers small businesses an ideal tax environment and has some of the most flexible, business-friendly corporation laws in the country. Franchise taxes on corporations account for roughly one fifth of revenue generation for this state, leading many companies to incorporate in Delaware.
Taxes
One reason that LLCs have become so popular is due to their advantageous tax structure that allows you to minimize business taxes. With C corporations, your profits are taxed first at the corporate level when profits are generated before being taxed again when distributed as dividends to owners (shareholders). With an LLC however, this taxation occurs twice over.
However, LLCs are much simpler. Instead of being taxed twice at both the member and company levels as in partnerships or sole proprietorships, only one tax payment needs to be made once at member level with an LLC.
Therefore, it makes sense to register an LLC in Delaware if your business will operate from there. Otherwise, forming it in your home state might provide more flexibility and protection.
Start by filing your Certificate of Formation with the Division of Corporations; this can be done online, fax, or mail and should take three or four business days for processing.
Management
Delaware is an ideal state for establishing LLCs for several reasons, not least of which its ability to protect assets while simultaneously lowering tax burdens.
Delaware boasts one of the fastest company registration processes and lowest incorporation costs in the US due to its established corporate laws that are regularly revised by practicing lawyers and law students.
Delaware General Corporation Law outlines that directors of corporations must act in good faith and with reasonable prudence when fulfilling their responsibilities as directors of a corporation. They should perform these responsibilities with skill, inquiry and diligence commensurate with ordinary prudence.
Many business owners choose Delaware LLC formation because there is no requirement to list details about its members, managers and officers – this means if they’re ever sued or investigated there will be no way to ascertain who really owns their company legally.
