As the most popular business entity type in Delaware, Limited Liability Company carries the characteristics of a dream structure that most investors are longing for.
Why incorporate in Delaware? Is it worth your time and investment? Along with tons of benefits, Delaware LLC also has some drawbacks that are worth considering. Let’s take a closer look at the advantages and disadvantages associated with this type of business structure!
1. Advantages of Delaware LLC
Straightforward formation and minimal requirements. It is no myth that you only need to file very little information to incorporate an LLC in Delaware. Moreover, a small filing is required to form an LLC. Meeting or voting requirements? Let your hair down as there are no requirements at all.
Flexibility. When it comes to the flexibility of Delaware LLCs, there are two things that need to be mentioned:
- Fewer restrictions on personnel responsibilities. Your managers, members, or you don’t have to be residences of Delaware in order to form an LLC. Plus, the manager and member of your LLC can be one person as per the law.
- Freedom of contract. The LLC Operating Agreement, which is created by the members of the LLC, decides the structure as well as the rules of that LLC. This customized business structure and rules are tailored to fit the distinct needs and operations of an LLC in Delaware. This can be considered as the biggest perk of a Delaware LLC.
Privacy. Do you know that Delaware is one of the few states that allow names of the managers and members to be excluded when filing the documents? You are not obligated to disclose any information about the members of the LLC in order to incorporate and maintain your company. This also forms a level to protect the anonymity and privacy that you cannot experience in most the other states.
Asset protection. As a pass-through entity, Delaware LLC asset protection has remained one of the most crucial reasons why most people opt for it. If you or a member of your LLC is involved in a lawsuit, the creditor cannot strive for the LLC or acquire any portion of the LLC’s assets. In simple terms, this perk brings protection to everyone in the company.
Tax advantages (multiple taxation options). When you form an LLC in Delaware, you can choose the way your LLC is taxed. You are offered a wide range of options: taxed as a pass-through entity, as an S corporation, or as the default option.
Well-respected legal system. There are good reasons behind the popularity of Delaware as a place of incorporation. One of them is the most advanced and flexible statute in the US.
Another big perk is The Court of Chancery in Delaware. This court is made for corporate-related issues. What sets this legal system apart from others is that the Delaware court uses judges instead of the jury to decide cases regarding business matters.
Series structure. A special business structure that is distinct to Delaware is series LLC. Basically, it is just a normal LLC, but in Delaware, you can register for different series.
Each series is treated as an individual LLC that operates within the original LLC without the burden of paying extra franchise taxes or additional registered agents. What’s more? Each series in the LLC has a separate legal from the other.
2. Disadvantages of Delaware LLC
Moving on to the disadvantages you might have to face when incorporating an LLC in Delaware.
Dual registration. Believe us when we say Delaware LLC might not be the most ideal for small businesses. Let’s take a quick example!
Henry incorporated an LLC in Delaware for taxation purposes. However, he wants to do business in Ohio – a different state. In order to do this, Henry has to register his company as a “foreign corporation” in Ohio.
Not only this results in dual registration, but it also forces Henry to create 2 reports each year. In simple terms, Henry has to file 2 state tax returns and pay for 2 sets of filing fees as well as renewal fees.
But the story doesn’t end here. Henry also has to maintain 2 registered agents or even 2 attorneys in each state.
No legally tested business structure. As mentioned above, series LLC is an extraordinary perk of incorporation in Delaware. However, everything is a double-edged sword. And series LLC has its own downside.
This unique structure of a series LLC is not widely-accepted outside of Delaware. In fact, this business structure has not faced a legal test yet. This leads to most courts outside of Delaware will likely taking no notice of the separate assets, liabilities, and records of each distinct series. In this case, the umbrella LLC will be treated as the main corporation that is liable for everything.
Difficulty in obtaining separate identification numbers. Another drawback that is associated with the series LLC structure is that it is quite difficult to obtain a separate identification number. The separate series within the LLC might be unable to get a unique identification number for federal tax purposes.
More costly. It is no exaggeration to say that incorporating an LLC in Delaware can be more costly in the following cases:
- Series LLC has higher administrative costs as there are several series within the umbrella company. Accounting costs can be increased because of the unfamiliarity of the accountants with the structure.
- The Delaware franchise tax $300 per year.
- Foreign qualification cost is a crucial issue to consider if your plan is to conduct business outside Delaware. It takes around 10 working days to obtain a foreign qualification, not to mention the cost to register for one.
Delaware LLC benefits might be ideal to investors worldwide. However, there are lots of things that need to be considered: the untested structure, dual registration, and other responsibilities.
Prior to the actual incorporation process, you should consult trusted agencies about all of your concerns. BBCIncorp is always here to help. Contact us NOW!