How to Form an LLC in Delaware: The Affordable Way

Do you have a groundbreaking idea that can transform the market? The first step would be for you to select a business structure. Forming an LLC can be an excellent choice for the business you are trying to form. It opens the door for tax savings and gives the benefit of limited liability.

Delaware is one of the most popular destinations in the USA to incorporate an LLC. Close to 68% of all Fortune 500 companies are incorporated in the State. Delaware also offers tax benefits to LLCs and investors. The company courts of the State are efficient and accurate in resolving disputes; this makes Delaware a great choice to incorporate your LLC.

This guide will walk you through every step in incorporating your LLC in Delaware. Keep reading to find detailed information about filing methods, costs, taxes, and anything else you may need.

Naming your Delaware LLC

The first step in setting up your LLC is to name your business. Your company’s name is how customers come to know about your business. The name you choose will be present on advertisements, websites, bank accounts, contracts, invoices, directories, etc. Make sure that you have a unique name that captivates your customers.

While naming your LLC, you must follow all the naming guidelines the State of Delaware has laid down.

Naming Guidelines

The name of your LLC has to meet specific requirements. The phrase ‘Limited Liability Corporation’ or the abbreviation (LLC/L.L.C) must be present in the name of your business.

You cannot use any word(s) that could potentially cause it to be confused with a Government Agency (For example, State Department, FBI, etc.)

Similarly, usage of certain words, like “Bank” or “University,” is restricted and involves obtaining the written consent of concerned authorities and additional paperwork and compliance requirements.

Your LLC’s name must be different and unique, i.e., distinguishable, from any other business (Corporation, Company, etc.) registered in Delaware.

Does your business require a DBA?

DBA or “Doing Business As” is an alternate name under which you can choose to conduct your business. It is also known as ‘Fictitious Name.’ It is different from your LLC’s name, and you can choose to register a DBA for your Delaware LLC if you wish to.

Your LLC’s name may be sufficient to represent your brand, and you can conduct any day-to-day operations ( like accepting and making payments) under the same name. However, as your LLC’s business grows, you may want to enter a new market or completely change the marketing strategy of your LLC. Your LLC’s registered name may no longer be suitable, which is when you would obtain a DBA.

In Delaware, to obtain a DBA, you must fill out the application and mail or hand-deliver the application to the respective County clerk’s office where your business is located.

Doing a Name Search and Name Reservation

You can use the Name Availability Search on the Delaware Department of State website to ensure that your name is available and not already under use by an existing business entity. 

If the name you want for your LLC is deceptively similar to the names in the list, you cannot use that name for your LLC. Instead, you will need to either come up with a new name or think of a unique variation of the same name. 

If you have chosen a name but have yet to complete incorporating your LLC, you can reserve a name for 120 days using the State of Delaware’s official website.

Registering your business domain

Ensure that the domain name corresponding to your Delaware LLC name is not already in use and is available. Buying the URL gives you the option to set up a website for your LLC, should you wish to. A website is beneficial to growing your LLC and attracting new customers. So before you select a name for your LLC, it is recommended that you ensure that the domain name you need is also available.

You can check currently available domain names.

Choose a Registered Agent in Delaware

A registered agent is essentially a liaison between the State of Delaware and your business. A Registered Agent is an individual or a business entity that receives legal documents, tax notices, service of process in case of lawsuits, and any other government correspondence on your LLC’s behalf and forwards similar communication to the State of Delaware. 

They ensure that your business can receive documents when you are away from home, out of the office, or if your business is registered outside Delaware. Every Delaware LLC is, by law, required to have a Registered Agent under the Delaware Code § 18-104.

Who can be a Registered Agent?

Anyone, including yourself, your family, friends, or another entity, can be a registered agent, provided they: 

• Are aged over 18 years (Incase of an individual);
• Have a street address in Delaware;
• If the registered agent is a legal entity, then it must be permitted to do business in Delaware;
• Must be available to receive communications during regular business hours.

Individual v. Registered Agent Service

While you can appoint yourself as the registered agent, it may not be advisable for all businesses. You should hire a professional registered agent service as it has many advantages.

The registered agent’s address is available for the public to access on the concerned websites. So if you work out of your home or a private office, having a professional registered agent service will help you maintain privacy.

A Registered Agent Service ensures that your LLC files Annual Reports, taxes, etc., and ensures timely responses to lawsuits by sending you periodic reminders. This helps your LLC remain in good standing and avoid unnecessary fines.

A Registered Agent Service scans and uploads all legal, commercial, and other documents your LLC receives online, thus allowing you to download them as PDFs at any time.

If you are your own agent, you risk receiving sensitive documents like notice of a lawsuit in front of your employees or clients. Having a professional registered agent service helps you handle the situation discreetly. They receive such sensitive documents at their address and deliver them separately.

Filing the Certificate of Formation with Delaware

The Articles of Organization, called the Certificate of Formation in Delaware, is a document you must file with the State to set up and register your LLC. It is a legal document needed to form and legally incorporate your LLC officially.

You will need to provide details such as the name of your Entity as well as the name and address of your Registered Agent. It is to be filed with the office of the Secretary of State. Once this is completed, your LLC is registered and is recognized in the eyes of the law. 

Expedient Filing

The State takes anywhere between 10 to 15 days to process your application. You may, however, choose to expedite your application by opting for expedited service. Please read the Delaware Department of State’s Fee Schedule to know about the expedited fee and other details. 

Public Notice of Formation

As of now, the State does not have any provisions pertaining to a mandatory public notice of formation for your LLC.

Create the Operating Agreement for your Delaware LLC

An operating agreement is a legally binding, internal document that establishes the structure of ownership, processes, and operating procedures of your LLC. It also provides a framework concerning the duties of members of the LLC and its managers.

Even though the laws in the State do not mandate an operating agreement, you should have one. The State of Delaware recommends that all the members of an LLC enter into a written operating agreement (Section 18-101(7) of the Delaware Limited Liability Company Act). It prevents conflict among your company’s partners, especially in a multi-member LLC case. In addition, an operating agreement lays out the roles, functions, and responsibilities of every member of your business.

Irrespective of the nature of your business, it shall be advisable for your operating agreement to cover the following matters:

• Organization Details 
• Ownership 
• Duties of Members and Managers
• Management and Voting 
• Capital Contributions
• Division of Profit and Losses
• Bookkeeping Procedures
• Procedure for adding new members
• Requirements concerning Meetings and Procedures thereof
• Dissolution

An Operating Agreement also helps preserve your business’s Limited Liability status. In the case of a single-member LLC where you are the sole owner, an operating agreement ensures that courts uphold the limited liability status of your company.

Writing the Operating Agreement Yourself v. Hiring a Service

You could choose to write the agreement for your LLC by yourself. Numerous guides and free templates are available online to assist you, thus saving you money and time. There are templates for single-member, multi-member, member-managed, and manager-managed LLCs.

Alternatively, you can hire a professional like an attorney to draft your operating agreement. A professional will help you create a well-drafted Operating Agreement with all the necessary details for a small fee. This will save you valuable time and effort, which you would have otherwise spent writing it yourself.

Hiring a service is more convenient, gives you greater peace of mind, and allows you to devote more time to other aspects of your business.

Limits of Operating Agreement

You cannot use your Delaware LLCs Operating Agreement outside the State. Therefore, if you decide to expand your business outside Delaware or set up a foreign LLC, you need to create another Operating Agreement that follows the laws of that particular State.

Additionally, the terms of your operating agreement are limited to the law. You cannot include something prohibited by the laws of Delaware.

Obtaining an EIN for our Delaware LLC

An EIN or Employer Identification Number is a nine-digit number assigned by the Internal Revenue Service (IRS) to identify a business for tax and filing purposes. It is, quite simply, a Social Security Number (SSN) for your LLC.

An EIN is also known by other names – Federal Tax Identification Number, Taxpayer Identification Number (TIN), etc. Applying for an EIN for your Delaware LLC is entirely free of charge.

If your Delaware LLC hires employees or has more than one member, you are required by the IRS to obtain an EIN for your business.

If you are filling out your EIN application online, you must complete this application in one session. You cannot save it and finish it later. Each session lasts only 15 minutes and times out if it is inactive. The website will generate your EIN as soon as you finish this process. A valid SSN or TIN is needed to apply online. If you do not have either, you must Fax or mail the application to the IRS.

File Annual Reports for your LLC

An annual report is a document used by the authorities to get the latest and updated information about all the business entities operating in the State.

Delaware is one of the few states that do not mandate their LLCs to file annual reports.

Tax Liability for your Delaware LLC

There is a large variation in the taxes paid by a Delaware LLC. Due to the complexities involved, it is advisable to hire a local tax professional to guide you. However, the following is some general information.

There are four ways in which LLC will be taxed:

• Sole proprietorship: a business owned by a single person
• Partnership: a business owned by multiple people
• C – Corporation: income is split or segregated for taxation
• S – Corporation: tax liability is split between the business and its owners

Federal Tax Liability

If you’re a single-member LLC, your default taxation type will be that of a sole proprietor. The LLC has to report its activities under Schedule C, Schedule E and/or Schedule F of Form 1040. 

If your LLC has more than one member, it will be taxed as a ‘partnership’ by default. In this case, apart from filing Form 1040, you’ll have to file your partnership return in Form 1065 and provide information in the K-1 of each partner. 

You must pay Federal self-employment tax (presently 15.3%) on the profits you take from your LLC. You are eligible for certain deductions in the nature of business expenses. You are also liable to pay Federal Income Tax. The income tax you have to pay will vary depending on your income, filing status, deductions, etc. However, if you treat your LLC as a corporation for tax purposes, federal corporate taxes must be paid.

If you would like your LLC to be taxed like a C-Corp or S-Corp, you can do so by filing Form 8832 and Form 2553, respectively.

State Tax Liability

If your Delaware LLC has a multi-member structure, you must file a tax return using the Delaware form 300-I. 

Download the Form using the link and fill in the necessary details. There is NO filing fee for this Form. You can file it by mailing the completed Form to the Division of Revenue, P.O. Box 8703, Wilmington, DE 19899

Delaware is one of the few states that does not have a sales tax. However, the State does impose a Gross Receipt Tax, which is calculated based on the business’s gross revenue. The tax rate may vary depending on the type of business your LLC is engaged in. You may visit the DOR website for more information.

Your LLC is required to pay a Franchise tax in the State. The tax amount is $300 for all LLCs. You must complete your tax filings and make the payment by the first of June every year. In case you miss this deadline, your LLC will be charged a penalty of $200 plus 1.5% interest per month for the period of delay. You can file the tax returns online using the Department of State website.

In case you choose to treat your LLC as a corporation for tax purposes, your LLC will need to pay Delaware corporate income tax, which is presently 8.7% of federal taxable income.

Miscellaneous Taxes

You must sign up for Withhold employee taxes if your LLC has hired employees. You will also be required to pay State unemployment insurance (UI) taxes. You can register for these taxes online using the Delaware Department of Labor (DOL) website. 

Permits and Licenses

To function, your LLC must comply with Federal, State, and local rules and regulations. Some examples of permits include Health permits, Liquor licenses, Building Permits, etc. 

Federal Licensing requirements will depend on the business activity carried on by your LLC. If your company is engaged in any area of business regulated by the Federal Government, you will be required to obtain relevant Federal Licenses and Permits. You may use the US Small Business Administration (SBA) Guide to understand more about your LLC’s Federal licenses and permits.

You must possess a business license in Delaware to operate your LLC. You can apply online, or you may download the form and send in your application by mail to: the Division of Revenue, State of Delaware P.O. Box 8750, Wilmington, DE 19899-8750.

Your LLC’s license costs depend on the business type and the incorporation month. The license is initially valid for one year, after which you can renew it for one or three years.

You may also need to obtain specific professional licenses for your Delaware LLC. Visit the Division of Professional Regulation website for more details. In addition, if certain counties or cities in Delaware require specific permits, you will have to contact your local government office.

For more information:

• State of Delaware Business One-Stop 
• Federal Permits and Licenses

Business Bank Account & Phone Number

After receiving your EIN, you may also set up a business bank account separate from your account for your LLC. This account helps you protect your assets by separating them from the LLC’s assets and also makes accounting and filing taxes more convenient.

Establishing a separate phone number for your LLC ensures that your customers have direct access to your business for any questions or concerns.

You must ensure that your LLC’s name, contact information (phone number, email ID), and office address are registered with the directory and present in any advertisement your company runs in newspapers, television, etc.

Ensure that the contact information is prominently displayed on your LLC’s website to ensure that it shows up when a customer runs a Google Search for your business.

Final Thoughts

Delaware is an excellent choice for your LLC. The State has a booming economy and a favorable taxation system for new and small businesses. Delaware is also one of the few states that do not charge a Sales Tax.

With the last step, you will complete all the procedures required to form an LLC in Delaware. Double-check all the documents and information before you file your application. If you’re still hesitant about the process, you can always use an LLC registration service that suits your needs. Enjoy your new LLC!