What Are the Benefits of a Delaware LLC?

By Edward A. Haman, J.D.

What Are the Benefits of a Delaware LLC?

By Edward A. Haman, J.D.

Well over half of the Fortune 500 companies are incorporated in Delaware. With the relatively new creation of the limited liability company (LLC), many newer companies are choosing or considering Delaware as the place to organize their LLC.

Yellow file tab which says "Delaware Corp"

Benefits of a Delaware LLC

This article primarily deals with forming a Delaware LLC if your business will be operating in a state other than Delaware. If you will be doing business in Delaware, and especially if your primary business will be in Delaware, then you should set up your LLC there. The benefits of a Delaware LLC include the following.

Simple and Low-Cost Formation

Forming an LLC in Delaware is a simple process compared with that of many other states. It involves filing a cover memo and Certificate of Formation with the Division of Corporations and paying a nominal filing fee. The information required is basically the name of the LLC and the name and address of a registered agent, who will receive any legal notifications on behalf of the LLC. There are no requirements for a written operating agreement, annual member meetings, or annual reports. An LLC not doing business in Delaware does not need to register with the state Division of Revenue or obtain a business license.

Taxation

A Delaware LLC not doing business in the state does not have to pay state income tax or gross receipts tax but does pay an annual franchise tax and an annual registered agent fee. There is no Delaware tax on intangible property. LLC members who are not Delaware residents are not taxed on their share of profits. For the most current information on formation and taxation, visit the website for the Delaware Division of Corporations.

Confidentiality and Asset Protection

Unlike in many states, a Delaware LLC is not required to disclose any information about the owners. Anyone seeking to sue you or to find out information about your financial situation will not be able to check the Delaware LLC records and learn about your ownership interest.

Specialized Business Court

Unlike other states, Delaware has a special court for business disputes. For more than 200 years, the Court of Chancery has developed corporate law. The court's jurisdiction, and most of the legal principles that apply to corporations, has been extended to LLCs. This has resulted in a large body of law on business matters, which gives a great degree of predictability as to how disputes will be resolved. Disputes in the Court of Chancery are resolved by judges with expertise in business matters, not by juries.

Freedom of Contract

The structure of an LLC is governed by the LLC operating agreement, which includes setting forth the rights and responsibilities of members, as well as how member disputes are resolved. Some states have rules controlling the structure of an LLC, but Delaware law affords an LLC great freedom in how it sets up the operating agreement.

Series LLCs

Delaware offers the ability to set up a series LLC, which allows a single LLC to have numerous divisions, known as series, with each series operating as a separate entity, with its own assets, members, and limitation of liability. In the event of a lawsuit against one series, the assets of other series are protected. This is commonly used by rental property owners, where each property is owned by a separate series. A series LLC, with various degrees of limitation, is currently available in just over a dozen states.

Disadvantages of a Delaware LLC

If your LLC has its primary place of business in a state other than Delaware and does most of its business in that home state, there are other factors to consider.

Multiple-State Registration and Reporting

A Delaware LLC will still have to register as a foreign LLC in its home state. This results in multiple filing fees and annual reporting requirements. Also, in order to register in your home state, you probably need to obtain a Certificate of Good Standing from Delaware, which comes with a nominal cost.

Multiple Registered Agents

All states require an LLC doing business in the state to have a registered agent. A Delaware LLC will need to have a registered agent in both Delaware and its home state. This usually requires hiring a company in Delaware to serve as your registered agent there. Fees for such service typically start at about $130 per year.

Multiple Taxation

While the Delaware franchise tax and registered agent fee may be relatively low, you will still need to pay whatever taxes are assessed by your home state.

Oral Operating Agreement

Unlike most states, Delaware law allows an oral LLC operating agreement, which means that conversations between LLC members could be construed by a court to be an operating agreement. A written operating agreement will supersede any oral agreements, provided the written agreement includes a provision that the written agreement is the sole agreement and that any modifications must be in writing. So if you form your LLC in Delaware, it's a good idea to have a written operating agreement even though it's not required by law.

Lawsuits

Unless you are operating a type of business with a high likelihood of being sued, you will probably never need to use the Delaware Court of Chancery. Having disputes heard in the Delaware chancery court can give your LLC some legal advantages, but it can also be a burden to have to travel to Delaware for court appearances.

While Delaware offers various advantages for LLCs, for most small LLCs not operating in Delaware, the disadvantages usually outweigh the advantages.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.