Forming an LLC in Delaware: 7-Step Guide

12/11/2023 08:56 AM

Take the specific steps outlined below to secure a Delaware certificate of formation for a new LLC.

While it’s no secret that corporations benefit from incorporating in Delaware, did you know that forming an LLC in Delaware can be advantageous, too? More than half of America’s Fortune 500 companies have opted to incorporate in Delaware because of its famously low corporate taxes, business-friendly climate and business-centric legal environment. Entrepreneurs interested in forming an LLC in Delaware benefit from all of these corporate conveniences as well.

If you’re interested in creating an LLC in Delaware, you’ll want to confirm that this legal structure best meets the needs of your new business. If you opt to launch an LLC in Delaware, you can follow the steps listed below to secure your company’s Delaware certificate of formation:

Pick a business structure
Choose a formal company name
Name a registered agent
Complete a Delaware LLC certificate of formation
Secure a federal EIN
Formalize your operating agreement
Look ahead

Step-by-Step Guide: LLC Formation

1. Pick a Business Structure

If you aren’t yet sure whether forming an LLC in Delaware will best meet your new company’s needs, it’s time to learn more about the pros and cons of choosing a limited liability company as a formation structure.

LLCs serve as the middle ground business structure option. They can be taxed as either a distinct business entity or one in which Delaware LLC owners (referred to as members) are taxed on their personal tax returns. They also benefit from flexible managerial options.

But, most importantly, members of an LLC benefit from limited liability protection. This means that the personal assets of LLC members remain protected in the event that their business is sued, incurs losses or goes bankrupt. Without this protection, a business owner could lose their personal wealth, property and assets if something goes wrong with their company.

You can’t accurately weigh Delaware LLC advantages and disadvantages without considering alternative business structures. There are three primary alternative options available to you: Sole proprietorship, partnership and corporation.

Sole Proprietorships and Partnerships

Sole proprietorships and partnerships offer the same potential benefits and drawbacks:

They don’t need to be formally registered with the state
They aren’t compelled to comply with annual reporting requirements
They’re taxed on the personal tax returns of company owners
They don’t offer owners personal liability protection

The distinguishing feature between these two options is that sole proprietorships are owned by a single person, whereas partnerships have at least two owners.

Corporations

Sole proprietorships and partnerships are the most flexible business structures available. By contrast, forming a corporation is the most rigid business structure. A corporation is owned by those who own shares in its enterprise. Shareholders are insulated from personal liability and aren’t taxed directly. Instead, a corporation is taxed as a singular entity. Unlike the other business structures, corporations must observe strict management hierarchies and are subject to rigorous reporting requirements.

If, after weighing your options, it’s clear that forming an LLC in Delaware is the best course of action for your new company, follow each step below in order to achieve this goal.

2. Choose a Formal Company Name

Branding is an important part of what keeps businesses viable. If a competitor can capitalize on your company’s branding without your consent, all of the work that you’ve put into building customer loyalty could amount to very little. As a result, Delaware actively protects the brands of companies operating in the state by insisting that new companies abide by specific naming regulations. This includes ensuring that business names are distinct from one another.

Your LLC’s formal legal name, which will be listed on your certificate of formation and filed with the state, must contain the phrase “Limited Liability Company,” the designation “LLC” or the punctuated abbreviation “L.L.C.” Also, it must be distinguishable from the names of other companies already doing business in Delaware. You can’t, for example, simply add a letter “s” to name your company Poodles, LLC if there’s already a business in the state operating a business called Poodle, LLC.

To see if a name is available, and to compare whether that name is distinguishable from those being used by other companies, consult the Delaware Department of State’s Division of Corporations business search tool. Once you’ve settled on a formal name that you like, you can reserve it for up to 120 days provided that you submit a filing fee with your application.

DBAs and Trademarks for Your Delaware LLC

When forming an LLC in Delaware, you’ll need to choose a formal, legal name for your business. You don’t have to use this formal name in advertising and other branding efforts. You can contact the Superior Court clerk in the county where your Delaware LLC will do business and register a trade name to use as a “doing business as” (DBA) company title. For example, the formal corporate name of the Pepsi Cola Corporation is PepsiCo, Inc. But, this corporation regularly conducts business simply as Pepsi.

Inside Scoop: During this time, you’ll want to conduct a nationwide trademark search to better ensure that you don’t run into any intellectual property concerns with out-of-state businesses down the road. You’ll also want to think about trademarking your company’s name as soon as you can for this same reason.

3. Name a Registered Agent for Your LLC

Making sure that your Delaware LLC is alerted to paperwork that has been sent by the government or served as part of a lawsuit is serious business. This is why Delaware requires LLCs to appoint a registered agent to act as the point of contact for official documents. You’ll want to appoint either a responsible person or company to act as the agent for service of process on behalf of your LLC.

If you choose to appoint an individual, they must reside in Delaware. You or another member of your company may act as its registered agent. You can also appoint any business, including your LLC, to act as your registered agent, as long as its office is physically located in Delaware. Most states don’t allow LLCs to act as their own registered agents. This is just one of the many convenient approaches that Delaware takes to maintain its business-friendly climate.

If you’re looking for a reputable registered agent and you don’t want to serve in this capacity on your own behalf, check out the list of agents that the state maintains on its website.

4. Complete a Delaware LLC Certificate of Formation

One of the most important steps when forming an LLC in Delaware is alerting the state to the fact that you’re opening for business. Completing a certificate of formation and submitting a filing fee to the Delaware Secretary of State will accomplish this goal.

Thankfully, you don’t need a ton of information to complete the form and you don’t need to engage in any additional Delaware LLC search tasks before you fill it out. All you’ll need is the formal name of your business, the address of its registered office, the name of its registered agent and the signature of someone authorized to confirm this information.

Inside Scoop: An LLC member acting as an organizer or someone appointed by an organizer is authorized to sign the form. Note that the address of your LLC’s registered office is the same as the address of your LLC’s registered agent.

5. Secure a Federal Employer Identification Number

You won’t be able to open a bank account, apply for loans or establish business-related credit until your Delaware LLC is assigned a federal employer identification number. This number acts much like an individual’s Social Security number. It allows the government, creditors and even vendors to correctly identify your LLC. Delaware business law is lax at times, but the state doesn’t compromise on this requirement.

The only circumstance that will allow you to skip this step while setting up an LLC in Delaware is if you’re operating a single-member Delaware LLC and you’re not going to hire any employees. Once you apply for an EIN online, it won’t take long to receive.

6. Formalize Your LLC Operating Agreement

Although drafting an operating agreement isn’t a mandatory step in forming an LLC in Delaware, you should skip ahead in this guide only if you’re launching a single-member LLC. All multi-member LLCs need an operating agreement in place for a few important reasons. If you don’t draw up a contract with your fellow LLC members now, you might run into significant financial, practical and legal disagreements down the road.

You and the other members of your LLC can set expectations related to a variety of subjects in your operating agreement. Many of these contracts address the following matters that eventually become important to Delaware LLC operations:

The ownership percentage of each LLC member
When meetings occur and how they are conducted
Whether the LLC will be taxed as a corporation or on the personal returns of its members
Procedures for modifying LLC membership
Guidelines for buyouts and buy-sell opportunities
Rules that must be followed if the LLC is ever dissolved
The powers and responsibilities assigned to each member
Distribution of voting rights
How profits and losses will be allocated
Duties and restrictions assigned to members, managers and LLC investors
Understandings concerning indemnification and liability

Inside Scoop: Because operating agreements function as contracts, they tend to use highly technical language. Consider connecting with an attorney to help draft or review an LLC operating agreement before you sign anything. As this is the most consequential document associated with forming an LLC in Delaware, you’re not going to want to take any of its language for granted. This is true regardless of whether you’re newly launching an LLC or you’re navigating the process of Delaware company registration for non residents.

Certificate of Formation vs. Operating Agreement

The process of crafting your LLC’s operating agreement is different from filling out the Delaware LLC certificate of formation. The certificate of formation notifies the state of your business operations and provides basic contact information so that the state knows how to get hold of you.

By contrast, an operating agreement formalizes the fundamental understandings you’ve made with your fellow LLC members about how your company will be run. When properly executed as a contract, this agreement becomes legally binding.

7. Look Ahead

Once you’ve gone through the process of starting an LLC in Delaware from a legal perspective and you’ve turned in all of your Delaware Secretary of State forms, it’s time to put your finances, insurance needs and other aspects of your new company’s foundation into place. Apply for a business bank account and credit card. Purchase insurance for your business and learn about your Delaware workers’ compensation insurance obligations.

Hire an accountant and speak with an attorney about complying with state business tax mandates. Now that the state has been formally notified of your new LLC, it’s time to get your operation off the ground.

Forming an LLC in Delaware FAQ

Does Delaware require LLCs to file annual reports?

While most states require LLCs to submit annual reports about their operations, Delaware doesn’t. Although this absence of a reporting requirement can serve as a welcome relief to overstretched business owners, don’t let this lax regulatory approach keep you from maintaining immaculate financial, operational and legal records.

The state doesn’t need to know what your business is up to on an annual basis. But, the Internal Revenue Service, your creditors and anyone who might sue you might need access to meticulously kept business information at some point in time.

Can an established foreign LLC conduct business in Delaware?

If you’ve launched a business located in another state, you can do business in Delaware as a “foreign” LLC as long as you take certain steps. Because your business is already established, you won’t need to go through all the steps of forming an LLC in Delaware. Instead, you’ll need to confirm that your company name is available to use in the state, secure any licenses or permits you might need, pay a filing fee and submit the following two documents:

Certificate of Registration of Foreign LLC
Certificate of Existence or a Certificate of Good Standing (your established LLC’s home state must have verified your company’s standing within the past six months)

Does Delaware require LLCs to obtain a general business license?

Delaware is stricter than most states when it comes to the issue of business licensure. Before you can open your doors, you’ll need to file for a business license and pay a filing fee.

Depending on where in Delaware you’re conducting business and what industry you’re a part of, you may need additional licenses. Speak with an attorney, contact your local government or connect with the professional organization that governs your kind of business if you have questions.

Are You Forming an LLC in Delaware? Get Started Today

Online Delaware LLC filing resources help to ensure that aspiring business owners don’t miss a step when registering their new companies. Check out our best LLC service guide to get your LLC off the ground without delay.

Legal Disclaimer: This article contains general legal information but does not constitute professional legal advice for your particular situation and should not be interpreted as creating an attorney-client relationship. If you have legal questions, you should seek the advice of an attorney licensed in your jurisdiction.