Are you forming an LLC for your US-based business but unsure if Delaware is the best option for you? Read on to explore the pros and cons of forming a single-member LLC in Delaware.
Forming a Delaware LLC begins with selecting an exclusive business name that is not in use by another business. Once chosen, there must be no further steps taken until it becomes active.
Legality
One of the most frequently asked questions we get about forming a single member LLC in Delaware is “Can I form an LLC there?” The answer is yes – Delaware was actually the first state to recognize limited liability companies as legal business entities.
The LLC offers the liability protection of a corporation with the flexibility and lack of formalities of a partnership. This makes it an ideal option for businesses that need high levels of personal liability protection from business debts and lawsuits, as well as greater ease of management.
A single member LLC can be managed and structured in various ways by its members or managers, such as classifying them into voting or non-voting units, assigning voting rights and/or entitlements to specific individuals or groups, and outlining the terms of their relationship with the company.
As a member, you should complete an operating agreement to establish the rules for how your LLC functions. This document outlines who owns what and how decisions are made.
Taxes
Many entrepreneurs find forming an LLC to be a cost-effective and hassle-free way of doing business. Delaware is one of the most popular states for setting up an LLC due to its straightforward formation document and filing process that protects personal information from exposure.
Taxes associated with a single member LLC depend on the structure of your company and which tax status you select. Generally speaking, standard LLCs and partnerships are pass-through entities – their profits are distributed to owners who then pay applicable federal and state taxes on those amounts.
By default, a single-member LLC is taxed as a sole proprietorship; however, it can be structured to be classified as either a partnership or corporation for income tax purposes. If you wish to have your LLC treated as a corporation for taxation purposes, it must file DE Form 1100 or Form 1100S with the Secretary of State and pay any applicable corporate income taxes accordingly.
Ownership
Why form a single member LLC? One of the primary advantages is that it allows you to keep your personal assets and liabilities separate while still having a legal entity with limited liability.
Furthermore, a single-member LLC is treated as a disregarded entity for tax purposes. This means you won’t have to pay state income tax on the profits of your business even if there is no money left in its bank account at yearend.
In addition to taxes and insurance, there are other costs you should factor into your budget for starting a company. These include renting storefront or office space, paying employees, as well as purchasing equipment and software.
It’s essential to have an operating agreement in place for an LLC. This document lays out the rules and expectations for owners, which can help avoid miscommunication and safeguard your business from legal disputes.
Management
A single member LLC is a business structure that provides privacy to its owners and asset protection. Delaware single-member LLCs can be an ideal choice for many businesses, from real estate transactions to solo consulting practices.
One of the best ways to protect your company and personal assets is by opening a business bank account. Combining them could leave your personal possessions vulnerable to liabilities (like lawsuits) from your business venture.
You can avoid using your social security number for the business by applying for an Employer Identification Number (EIN). It’s free and straightforward to do.
Finally, Delaware and federal tax laws offer flexibility and advantages for LLCs. LLCs have the option to be taxed as a disregarded entity, partnership, or S corporation by filing additional paperwork with the IRS. This treatment can be beneficial to small businesses by saving them tax dollars; however it’s wise to consult a tax professional and attorney before determining which type of taxation will work best for your business.
