Delaware LLC Pros and Cons

If you're just getting started in the business world, you may be surprised to learn that you can incorporate your business in states other than your state of residence. Like most businesses, you can form your limited liability company (LLC) in another state that has business-friendly laws.

Delaware, known informally as the First State (or the Diamond State), is a top choice for investors or small business owners looking to incorporate or form an LLC. More than half of Fortune 500 companies (nearly 66.8%) are incorporated in the Diamond State. In 2021, 93% of all U.S. IPOs registered in Delaware. From tax benefits to flexibility, Benzinga spotlights the core Delaware LLC pros and cons in the home for big and small businesses and why it makes sense for you to incorporate your business in Delaware.

Why Start an LLC in Delaware?

A Delaware LLC is the most adaptable or flexible corporate entity offered by any state or nation, thanks to its minimal startup requirements, straightforward administration and maintenance and the opportunity for members to set their company structures and rules. Besides tax advantages and other excellent financial incentives, which for most business owners might be the deciding factor, there are other outstanding reasons why you may consider incorporating your business in the Diamond State of Delaware.

For instance, Delaware has a well-established and highly respected court system — the Delaware Court of Chancery — with unique competence and vast knowledge of and exposure to corporate issues and business laws. The implication is that should your business be involved in litigation, you'll have easy access to a judge with requisite expertise in business or corporate laws. The Delaware Court of Chancery uses judges rather than juries for adjudication, making it even more appealing for corporations. Corporate attorneys are familiar with Delaware business law, meaning there's a high probability your company's attorney is already accustomed to it as opposed to other states' business law.

In addition, Delaware has a robust economy and transportation infrastructure. Delaware is ranked second in favorable business climate and competitiveness according to New Jersey Business and Industry Association's 2023 report comprising seven states in the Maryland to Massachusetts region. And besides a limited liability company (LLC), you can form other varieties of businesses, including a limited partnership (LP), sole proprietorship (SP), limited liability partnership (LLP), S corporation, public benefit corporation (PBC) and others depending on your preference.

Pros of Opening an LLC in Delaware

Opening an LLC in Delaware offers many benefits that appeal to big and small businesses. Some of the advantages are:

1. Excellent Tax Benefits for Business Entities, Investors and Shareholders

Registering your LLC in Delaware allows you to choose how you want it taxed — whether as a partnership, a sole proprietorship, an S corporation, a C corporation, a pass-through entity or a default option. Regardless of your choice, you won't have to pay Delaware corporate income tax unless you engage in business activities within the state. Furthermore, there's no sales tax, state property tax or value-added tax (VAT). Although you might be subject to a gross receipts tax ranging from 0.945% to 0.7468%. In addition, shareholders living outside Delaware won't incur taxes on their shares. This makes Delaware-based companies highly appealing to diverse investors, especially angel investors and venture capitalists.

2. High Level of Flexibility

A Delaware LLC offers a high level of flexibility. The business terms, structures and rules are customized or tailored to meet an LLC's distinct needs or preferences in line with the operating agreements created by the members. This feature is called freedom of contract — possibly the most significant Delaware LLC perk. It also includes limited restrictions on personal responsibilities. For instance, neither you, your manager nor your members need to be residents of Delaware to form an LLC. Plus, the manager and member can be a single person.

3. Enhanced Privacy

Unlike most states, Delaware doesn’t mandate disclosure of your members' information during the incorporation or maintenance of your LLC. So the names of the managers and members can be excluded during filing. This benefit makes for great anonymity and privacy. However, the name and address of your registered agent are listed in the certificate of formation.

4. Same-day Filing with Minimal Startup Requirements

Forming an LLC in Delaware requires little information and a small filing fee. No meeting or voting is needed. In line with Delaware's corporation-friendly approach, your filings are often processed on the same day or within hours.

5. Businesses Can Form a Series LLC

Delaware allows you to form an LLC with other LLCs built into it. You can think of a Series LLC as a parent company with other companies beneath it, each having different members and entirely separate liability.

6. Asset Protection and Statutory Limitation on Personal Liability of Members

A Delaware LLC offers excellent asset protection against creditors. If a member of the LLC has a judgment filed against them, the creditor cannot attack or acquire any portion of the LLC assets. The statutory limitations on members' liability mean members are not liable for repayment if the company fails and leaves behind debts. They would lose the dollar amount they invested.

Cons of Opening an LLC in Delaware

While Delaware LLC offers various unique benefits, it also has some downsides. Some of the disadvantages are:

1. Dual Registration

Suppose you don't reside in or operate your business from Delaware. In that case, you must also register the company in your home state. Besides the inconvenience of this dual registration, you also have to pay two sets of filing and renewal fees. Furthermore, you're saddled with creating two annual reports and filing two states' tax returns. You must also maintain two agents and possibly two attorneys in each state, which can be challenging for a small business with limited resources.

2. Relatively High Fees

Although businesses may save money long-term by incorporating in Delaware, the short-term expenses may be too high. For instance, the filing fees are considerably higher than in most states. When you consider the additional cost of maintaining multiple registered agents, the foreign qualification cost, the administrative expense and the annual maintenance fees of $300, the fees can quickly add up, making it unappealing for small businesses.

3. Legally Untested Business Structure

While the Series LLC is undisputedly an exceptional perk of incorporation in Delaware, it hasn't been subjected to rigorous legal tests and isn't popular outside Delaware. So in a legal situation, courts outside of Delaware may refuse to consider the separate assets, liabilities and records of each distinct series, making the umbrella LLC liable for everything.

4. Tax Benefits May not Favor Small Businesses, and Franchise Tax Can Easily Add up for Big Businesses

The tax benefit, which is the core advantage of incorporating in Delaware, isn't beneficial to small businesses outside Delaware since they still have to pay taxes in their home state or operation base. So as a small business with less than $21.5 million in annual revenue, incorporating in Delaware only makes sense if you're a resident. Big corporations may have to deal with high franchise taxes, which are based on the company's share and increase as the company grows. The franchise tax can be significant, especially if the LLC also has to pay such taxes in the state where it operates.

5. High Potential for Legal Troubles

Suppose you're new to the business world. In that case, you might make a mistake that'll land you in legal trouble when you fail to properly adhere to the rules guiding your LLC and core operation base. For instance, if you fail to register your LLC as a foreign in your home state, you'll get a citation once the state finds out, regardless of whether you're ignorant of the requirements.

Compare Delaware LLC Companies

Benzinga compares and offers insights on the stocks of major Delaware LLC companies, insurance companies, virtual payment platforms and the best exchanges for investing.

Starting a Delaware LLC Has Never Been Easier

Now that you're aware of the Delaware LLC pros and cons, you can make a more informed choice about your business formation. If you're looking for a business-friendly environment with low taxation and a great set of laws, Delaware may be the perfect place for you to incorporate your business. With a little help, you can easily start a Delaware LLC and start the process of growing your business.

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