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Deleware LLC

For Delaware LLC prices and State fees, please visit the costs page for forming an LLC in Delaware.

In October of 1992, Delaware law recognized Limited Liability Companies (LLC)--and the rush was on. As the name implies, forming a Limited Liability Company offers members limited liability protection and certain tax benefits, especially in the business and corporate-friendly state of Delaware. And Fortune 500 companies tend to agree--over half of the Fortune 500 companies choose to incorporate in Delaware. The tiny state of Delaware is fast becoming renown as a business haven for mid to large corporations and LLCs looking for a business-friendly environment, with courts and systems that understand the sometimes-complicated corporate world. A large part of the attraction to this state is the fact that the state charges no corporate income tax on companies not operating within the state, though all Delaware corporations and LLCs must pay an annual corporate franchise tax. Delaware’s laws (i.e. the Delaware General Corporation Law) were designed to allow maximum flexibility to corporate structures and operations. With the added flexibility of an LLC, one can begin to see the allure of forming the LLC in Delaware. Forming the LLC in Delaware also offers members protection from business debts and lawsuits, potential taxation benefits, increased confidentiality, and greatly increased business flexibility. While there are a number of factors that must be considered before deciding that Delaware is the state best suited for your company, if these factors are applicable to you and your business, then forming your LLC in Delaware can offer a substantial advantage to you and your company.

Factors to Consider

An LLC offers the benefits and flexibility of ownership as a partnership, while at the same time offering the limited liability and asset protections of a corporation. In addition to this limited liability protection, there are also substantial tax benefits to be garnered from the formation of an LLC. A Delaware LLC allows for as few as one member or as many members as your company is willing to have, with no limitations on numbers, and no limitations with respect to types of stock. The company must select a managing member who is typically the figure head of the organization and is responsible for it’s management. The profits or losses of the business organization pass directly through to the Member's personal income tax return (“pass through taxation”), with no taxation at the LLC level. The net profit of the LLC is not considered to be income earned by the Members (though it can be for the Managing Member as a special “fringe benefit” treatment--see below), and thus is not subject to self-employment tax.

Once the election to form an LLC is made, it is imperative that a well-written Operating Agreement be drafted that specifically outlines the distribution methods, rights and benefits of members and the managing member, capitalization, and any other rights, duties, assignments and responsibilities necessary for the proper operation of the LLC. The Operating Agreement can be compared to the bylaws of a corporation, wherein a properly written one, and strict adherence to it, helps to ensure the “corporate veil” protection of the LLC.

Another often-cited benefit of an LLC is that it is not subject to the same, stringent corporate formalities that a C or S corporation is subject to. It can be simpler to establish and run an LLC, provided that a quality, well written Operating Agreement is in place.

Business Knowledgeable Courts

One of the primary reasons that Delaware is considered a business haven is because of the understanding that their court system is very sophisticated in its understanding and treatment of corporations. The courts in that state are generally regarded as more experienced in the application of corporate law than those of other states, mainly a by-product of the sheer number of companies incorporated there. Disputes over the internal affairs of Delaware corporations are frequently filed in the Court of Chancery, which is one of the last separate courts of equity (as opposed to “law”) in any U.S. state. Being a court of equity, there are no juries, and its cases are decided by the judges (or “Chancellors”) of the Court. These chancellors tend to know the “ins and outs” of the complicated corporate transactions and meanderings and hence render sophisticated judgments on issues that may baffle ordinary civil courts. Because the Court of Chancery cannot award money damages, Delaware's Superior Court, the trial court of general jurisdiction, also hears and considers a large number of cases between corporations involving claims for money. Finally, due to the number of corporations which choose to incorporate in Delaware, the Federal Bankruptcy court in that state handles many high-profile insolvency matters, and the United States district court for the district of Delaware considers many patent disputes between Delaware corporations.

Usury Laws

In the 1980s, then-Delaware Governor Pierre Samuel du Pont IV shepherded the Financial Center Development Act through the Delaware General Assembly. The act was instrumental in eliminating virtually all usury laws in Delaware, giving banks an immediate incentive to start credit-card subsidiaries in Delaware, as Federal law provides that usury limitations, or lack thereof, are limited to those of a bank's home state, irrespective of where the bank conducts business. This encouraged an explosion in competition among banks to issue credit cards with varying rates for various levels of consumer credit. And because of Delaware’s minimal regulation of interest rates charged, banks were able to issue high-interest rate cards to high-risk consumers.

Advantages and Benefits of Forming a Delaware LLC

Asset Protection from Liability. Delaware LLC members enjoy Limited Liability, which means they are mostly personally protected from any liability of the LLC and successful judgments, as well as from the LLC itself. Couple that with the Business Court’s reputation for efficiency and fairness with their experience in corporate law, and the benefit becomes quite clear.
Business and Corporation knowledgeable court systems.
Banking-friendly Usury laws.
Tax Advantages. Delaware charges no corporate income tax on companies not operating within the state, though all Delaware corporations must pay an annual corporate franchise tax.
A Delaware LLC allows for “multi-tiered” ownership wherein an S or C corporation can be a member--this can allow for substantial tax benefits, and increased liability protection.
Delaware allows for “single member” LLCs.
The LLC allows for the "special allocation" of profits--the disproportionate splitting of Member profits and losses (in different percentages than their respective percentages of ownership). This means that Members can enjoy the benefits of receiving profits (and writing off losses) in excess of their individual ownership percentage, so long as it is clearly delineated in the Operating Agreement.
Managing Members' share of net profit is considered earned income because the Managing Member is considered to be an active owner--therefore qualifying the Managing Member for special "fringe benefit" treatment.
The Members' share of the bottom-line (“net”) profit of an LLC is not considered earned income, and therefore is not subject to self-employment tax.
Members are compensated using either distributions of profit or guaranteed payments. A distribution of profit allows each member to pay themselves by merely writing checks--whenever they need the money (provided the business has the available cash). Guaranteed payments represent earned income to the members, thereby qualifying them to enjoy the benefits of tax-favored “fringe benefits.”
The Managing Member of an LLC can deduct 100% of the health insurance premiums he or she pays, up to the extent of their pro-rata share of the LLC's net profit, because the profit is considered earned income. Note: If a member has earned income, he or she will also qualify.
A Corporation can be a member of an LLC. This allows you to create an additional level of ownership, which is designed to create an entity that can offer such traditional “fringe benefits” as retirement plans and an additional level of protection from liability.
As a Member, you can contribute capital or other assets to the LLC, or loan the LLC money to put dollars or value into the business. You can take dollars out by taking a repayment of your loan (plus interest), a distribution of profit or a guaranteed payment. If any of the members die, the LLC can continue to exist--subject to the unanimous positive vote on the part of all remaining members or a proviso in the Operating Agreement.
Tax Advantages. Delaware allows for pass through taxation of LLCs and partnerships, and does not collect personal, corporate, inventory, franchise, gift, business occupation or stock transfer taxes. And with the federal “check box” method of taxation, the Delaware LLC can choose to be taxed via the partnership model with “pass through” taxation. This can amount to a substantial savings to a business.
The Delaware LLC has a perpetual life and membership is easily transferable. It is advisable to enter into a Members' Agreement if alternative conditions are required.

Delaware LLC Fees and Costs

Aside from a $60 state Franchise fee, based upon the number and value of shares, LLCs and most Limited Partnerships pay $200.00 every year

Charging Order

If a judgment is awarded against the LLC itself, it may be levied, and LLC’s property seized or sold in payment, much in the same manner that a corporation would be treated. Conversely, if a judgment is awarded against a particular member, and with a properly written operating agreement stating as such, distribution usually cannot be compelled to satisfy a member’s judgment debt (this is why it is critical to have a well crafted operating agreement, you’re your protection be mitigated). Creditors or judgment debtors have to satisfy themselves with a “Charging Order” that grants them rights to distributions made by an LLC to a particular member named in the judgment. This gives them the rights to that distribution, but does not affect the rights, assets, or distributions of other members or of the LLC as a whole. These types of protections characterize the attraction to LLCs by potential investors.

It should be apparent that forming your LLC in Delaware can offer a tremendous business advantage to your company, especially if you intend to operate out of state or in other jurisdictions. Potential investors are attracted to the security and asset protection implied by the business-savvy court systems and general corporation-friendly laws in Delaware, and the state offers a tremendous amount of benefits in the form of protection from liability, asset protection, taxation, and business flexibility. Incorporating or forming your LLC in Delaware will go a long way in making your company more credible in business and in investment-sourcing.