Delaware LLC Act: Everything You Need to Know

The Delaware LLC Act governs the limited liability company structure in Delaware which is a hybrid of the best features of both corporations and partnerships. 6 min read updated on November 10, 2020

The Delaware LLC Act governs the limited liability company structure in Delaware. The structure is essentially a hybrid of the best features of both corporations and partnerships and the owners are called “members.” If you incorporate under the Delaware LLC Act, you do not need to have an operating agreement, though you may have an agreement that governs some of the affairs of the limited liability company. Delaware has some of the strongest protections from liability for owners in the country, which is just one of the many reasons people choose to form a company in Delaware.

Why is the Limited Liability Act Important?

The main reason the Delaware LLC Act is important is that it is treated as a partnership for tax purposes, but provides the protection that a corporation offers. LLC’s in Delaware is one of the most popular entities filed, Other important features are that the owners and managers of an LLC are not personally liable for obligations and debts the company incurs. LLC’s offer an attractive level of protection from liability that many small business owners like. They also offer attractive tax benefits - an LLC may be treated as a “pass-through entity” for taxes, thus combining the best features of a partnership and a corporation. They are flexible entities, because unlike corporations, an LLC may have members that are companies or individuals; and those companies and individuals are unlimited and may be from anywhere in the world. Non-resident aliens who live in the United States can avoid taxes entirely if the LLC features are combined with income that was not earned in the United States. In Delaware, the members of LLC’s can remain anonymous, making it easier to hide the extent of your wealth and assets.

Why You Should Consider Incorporating Under the Delaware LLC Act

The Delaware LLC Act provides multiple businesses to business owners. First - tax benefits. If you select “partnership tax treatment” on the SS-4 Employer Identification Number form, the LLC is not double taxed – that is, it is not taxed at the entity level like a corporation is. A corporation is double-taxed – at the entity level and then again when profits are disbursed.

The LLC also has contractual flexibility, meaning all the members can determine the nature of their relationship and need only create rules on issues they can’t agree. Creditors cannot take control of another member’s voting rights or assets that belong to the LLC. Unlike the requirements of a corporation, the LLC’s operating agreement does not require bylaws, minutes, officers, directors, and meetings.

There is also flexibility in management, so managers can participate fully without their liability being affected. The liability of members is also relative to the amount of capital they invested - owners and managers are personally liable only for the amount they invested in the company. There are no minimum capital requirements to joint either - which means you can start a business for a few hundred bucks.

LLC’s offer tax flexibility that is particularly attractive to transfers of wealth and estate planning and any interest owned in an LLC is deemed personal property that can be transferred or assigned. Take note - once your interest is assigned to another person, you are no longer a member of the company.

The Act allows parties to restructure the business in multiple ways. A Delaware LLC can merge with another LLC, or any other business entity, even if it’s formed within another jurisdiction. In this case, foreign LLCs must file a Certificate of Registration of Foreign Limited Liability Company, accompanied by a certificate of existence dated within 6 months of the filing date, from the LLC’s home state. The fee for this filing is $200. There is no requirement that the LLC has to carry on business in Delaware, and aside from a minimal annual fee called the franchise tax, a Delaware LLC is not required to pay any taxes simply because it is an LLC. It’s only subject to taxation if it conducts business or receives income. This means businesses in other states can form their LLC in Delaware, and benefit from the good business climate there, without having to ever charge a dollar for their services or products.

Why You Should Consider Not Incorporating Under the Delaware LLC Act

LLC’s offer a lot of great benefits, particularly with liability and taxes, but it may not be for everyone. If you make a big investment in your LLC, the creditors can take all of it. It’s also crucial to set up an LLC properly, otherwise, the benefits might not help you. Distributions of assets, income, or profits may not be made to a member if that distribution causes the LLC to default to any creditor.

How to Form an LLC

  1. First, you must select a unique name, which can be done online with the Secretary of State. The name of the company must have some form of ‘Limited Liability Company’ in it - it can be LLC, Ltd., or even “limited”. The name can’t be misleading, or be confused for a federal entity, such as ‘Secret Service’ or “Department of Treasury.” You can reserve your entity name for up to 120 days online if you pay a fee of $75.00.
  2. Next, you must create an operating agreement, which is essentially the handbook to running the business - it would discuss management, profit distribution, termination of the company, and the like. These are incredibly useful documents, which Delaware requires you to create, unlike in other states. However, Delaware does not require these agreements to be publicly filed. This means the agreements can be confidential, and also changed as frequently or infrequently as necessary, without much hassle. The LLC agreement is also enforceable as a contract under Delaware law, making it a very powerful tool for business owners - especially if there are agreements to contribute cash or distributions at certain periods of time. This portion of forming an LLC might need legal expertise with a qualified attorney.
  3. The next step is to file a Certificate of Formation of Limited LIability with the Delaware Division of Corporations. The certificate should include the LLC’s name, and name and address of the LLC’s registered agent. You can mail in or fax this application, and the filing fee is $90.00. Each Delaware LLC must have an agent for service of process, which is an individual or entity which agrees to accept documents on behalf of the LLC in the event is sued. It can be its own registered agent if it is located in Delaware and has a physical street address. There are several companies that also offer this service, and there is a list of registered agents on the Secretary of State’s website.
  4. Once filed, there might be other tax and regulatory requirements for your LLC, such as the requirement to obtain its own Employer Identification Number (EIN) if you have employees, want to open a bank account, or want it to be taxed as a corporation. This can be obtained on the IRS website for free. You may also need to obtain local and state business licenses, so check with both Delaware and the jurisdiction in which your business exists. Unlike most states, Delaware does not require LLCs to file annual reports, but it does require a franchise tax and registered agent fee. The franchise tax is $300 and due June 1 of each year, and the registered agent fee is $99 each year. If you sell goods or services or have employees, you will also need to register with the Delaware Division of Revenue and may face additional tax liabilities, although Delaware has no sales tax.

Frequently Asked Questions

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