Single member Delaware LLC businesses have unique legal, financial, tax, operational, and privacy advantages. Let’s talk about why.
Delaware, of course, is well-known for being the business “home” for large corporations. According to the Delaware Division of Corporations, 66.7 percent of the Fortune 500 are incorporated in that state. However, in addition, Delaware has evolved into the go-to state for LLCs, especially for one-person businesses. Those enterprises range from startups and more mature operations to those needing a corporate structure for owning stock and managing real estate investments.
WHAT MAKES THE DELAWARE LLC UNIQUE?
Delaware is not the only state with favorable conditions for the LLC. Its stands out because Delaware and the kinds of LLCs it authorizes provide the overall best business environment for the LLC. Other states, such as Nevada, offer some of that but not all of what might be thought of as the “Delaware Package.” Essentially there are 10 key advantages.
WHAT IS AN “LLC?”
An “LLC” is a limited liability company. That corporate structure, organized under state law, is a hybrid of a corporation and a partnership. As with corporate shareholders, LLC owners – called “members” – are shielded from being personally responsible for business liabilities or debts. That provides the all-important benefit of asset protection. As with a partnership structure, there are special tax benefits.
In 1992, Delaware enacted the Limited Liability Company Act. That authorized the creation of LLCs in that state.
The one-owner business could opt for the LLC instead of the other structures because of the speed, user-friendliness, and relatively low cost of setting up this model.
THE 10 DELAWARE LLC UNIQUE ADVANTAGES
Business is a complex institution. Myriad factors collectively determine the success of any enterprise. They range from leadership and management to market savvy and regulation.
In Delaware, the elements which can give business, especially the one-person member, an edge include:
- The Delaware Business Branding. Delaware’s reputation or branding is that it provides a stable and slowly evolving business environment. That is sometimes referred to as the “Goldilocks” Effect. All the government entities are oriented to provide owners/managers and investors laws which can improve conditions for the ethical and profitable operation of business. In itself, that can encourage investment in the LLC.
- Ease of Formation. Setting up the LLC requires only two steps. One is a limited liability company agreement. The second is filing a certificate of formation with the Secretary of State. When those two are completed, the LLC exists.
- Affordable Filing and Maintenance Expenses. Compared to a number of other states, the expenses involved with the LLC are lower. But, overall, they are not the lowest. The point is that they are affordable, even for a startup.
Filling fees – $90
Annual Tax – $300
No need to file an annual report.
- Court of Chancery. That specialized court for adjudicating disputes in business is unique among the states. Judges who have expertise in business law, not juries, hear the cases and make the decisions. Other states have generalist judges who are elected or appointed through a political process.
The rulings made in the Court of Chancery are so respected that they are applied as precedents nationwide.
- Two-Way protection. Through the LLC structure, many states provide a shield – sometimes called the “veil” – which protects personal assets. Those assets are put legally beyond reach of creditors as well as judgments in litigation.
What is unique in Delaware is the second type of protection known as “the reverse shield.” To explain that in simple terms, that prevents creditors from seizing control of the company or liquidating its assets. What Delaware law regarding LLCs does is to restrict creditors to a “charging order” as the sole remedy. That means there can be a lien only against any profits. There is no granting the right to manage the business or have a governing vote about its affairs.
- Management and Contractual Flexibility. Delaware makes it its “business” to assist the LLC by allowing the member or members to custom-make the operating agreement. This facilities management and contractual flexibility. The operating agreement, although it has legal standing, is not filed with the state authorities. Rather it is maintained internally. But a current operating agreement must be maintained on file within the LLC.
The objective is to create the LLC model which is a fit for the member’s specific business focus, management, delegation of duties, revenue generation, financial controls, compensation, and any plans for adding partners.
In reality, this can anticipate problems which could develop down the road. When there are multiple members, the operating agreement can function as a kind of prenuptial contract. That can prevent litigation if the business relationship among members sours. According to The Balance Small Business, 70 percent of businesses operating with partners fail. Incidentally, that grim statistic may be a reason to operate the business as the one-person LLC.
- The Series LLC. The series LLC allows establishing individual stand-alone series or cells. That separates assets. Therefore, the liabilities of one part of the business will not “spill over” to the profitable ones. Delaware was the first state to amend its LLC laws to permit this. Only a handful of other states have adopted that feature.
- Location Flexibility. The LLC does not have to be operate in Delaware or transact business in that state. The only requirement is maintaining a registered office and a registered agent. That can be done through contracting with a service in the state which, for a minimal fee, will fulfill that requirement.
However, the states in which the LLC actually transacts business considers the LLC a foreign entity. Typically, there is the process of registering the business in those states through the Certificate of Registration or Certificate of Authority.
- Confidentiality. There is privacy protection. In the LLC operating agreement, the names of the members and managers are listed. But that information in confidential. In filings, members are not required to provide their names and addresses.
- Tax Advantages. Overall, Delaware is tax-friendly toward business. For LLCs which operate outside its jurisdiction, it does not impose taxes.
Also, here are the tax bright spots in these business contexts:
- No collection of sales taxes from customers
- No personal/business property tax. This could be a major savings for LLCs which own office buildings.
- No value-added or inventory taxes.
- No inheritance taxes.
- No tax on intangible assets such as trademarks.
USING YOUR DELAWARE LLC FOR STOCK MARKET INVESTMENTS
The Delaware LLC is a multi-purpose tool. Some use it to facilitate ownership of stock. That is because the LLC, created under state law, can engage in the same legal transactions as a person.
Typically, the process consists of the following steps:
- Verify that the particular LLC established has the authority for stock purchases. That is specified in the operating agreement.
- Check the operating agreement for the name of the member authorized for stock purchases. In the one-person LCC that would only be one person, of course.
- If the member is not licensed to purchase stock, then a broker-dealer must be contracted with to do the transaction for the LLC.
- After the purchase, record the transaction in the LLC records. This will require two steps. One is to create a new asset line for the stock. The value inserted must represent exactly the entire amount, including broker-dealer commission, spent in the transaction. The other is to balance the accounts by deleting the amount of the purchase from cash.
USING YOUR DELAWARE LLC FOR REAL ESTATE INVESTMENTS
The term “real estate investment” is a broad one. It can cover purchasing one rental property or “flipping houses.” For many in this niche, forming or using a current LLC in Delaware might be the best option among all the states to choose from. Nevada and Wyoming are also popular.
The investments may be located in multiple states. The Delaware LLC facilitates that without extra costs or penalties. The tax paid to Delaware would be $300.
However, the member typically will have to also handle procedural matters in the state where the property is based. The classic example would be four rental condos in Florida. The member must obtain Foreign Qualification in Florida and pay the filing fee. There would also be annual Florida taxes. That would allow it to operate the Delaware LLC there.
The decision whether to go through “this hassle” and not just create the LLC in, Florida, for instance, takes into account the unique advantages of the LLC. For many the issue is one of lowering the overall risk in operating a real estate investment business. A Delaware LLC covers all the bases better than what protections other states provide. This especially pertains to preventing lawsuits. In addition, there is the matter of confidentiality.
What also has to be taken into account, though, is the scope of the real estate investing. If it involves many properties in a number of states, then the LLC corporate structure might not be the best fit.
If the decision is made to establish the real estate LLC in Delaware, the next step is creating the operating agreement. In this era of digital legal services for consumers, some vendors in the LLC niche make available free templates.
DELAWARE LLC: ON CUTTING EDGE
Every government-related entity in Delaware, including the executive, legislative, and judicial branches, is dedicated to continually improving conditions for business. The track record for modifications of the LLC corporate structure has put Delaware on the cutting edge in that niche. In fact, other states frequently adopt those developments, be they additions such as the Series LLC or rulings from the Chancery Court.
Establishing a one-person LLC in Delaware can reduce risk, ensure justice in legal disputes, lower taxes, and maintain confidentiality.