Being from Delaware is a huge advantage for small company entrepreneurs. The state provides robust privacy protection, a business-friendly legal system, and personal income tax rates that are lower than the national average.
And if you reside abroad but do some of your business in Delaware or own real estate there, Delaware may be a good site to incorporate an LLC.
However, for the rest of us, the buzz surrounding Delaware-based LLCs is just that: hype.
And this is why:
1: You must still register anywhere you do business.
Because LLCs are administered at the state level, regardless of where you create your LLC, you must always register (and pay fees) in every state where you actually conduct commercial activity. States must differentiate between local and international LLCs in order for this to operate.
What is the difference between a domestic and a foreign limited liability company? Your company is a domestic LLC in the state where it was formed and a foreign LLC in all other states where it is registered to conduct business.
While a domestic LLC may be formed and maintained in Delaware, you must register as a foreign LLC in every other state where you conduct business.
If you do not conduct business in Delaware, this entails submitting a Certificate of Formation, engaging and paying a Delaware registered agent, and paying both formation and yearly fees – all in order to establish an LLC in a state where registration is not needed.
2: Delaware Has Expensive LLC Fees
There are various reasons why Delaware has such a good image among company owners, but the formation and maintenance costs are not one of them. The state of Delaware charges a $300 formation fee to incorporate an LLC. This is one of the country’s highest LLC creation fees.
Delaware also levies a $300 yearly franchise tax. This tax applies even to enterprises that do not generate revenue in the state of Delaware. The only states with greater yearly LLC costs are California, Nevada, and Massachusetts.
If you create an LLC in Delaware and then decide to dissolve it, Delaware charges a $200 dissolution fee only to submit the papers with the Secretary of State.
3: Delaware’s privacy safeguards are only as good as the least protective state in which you do business.
One of the most important elements highlighted in Delaware’s favourable business environment is the state’s robust privacy protection. While other jurisdictions keep personal information about company owners on file as a public record, Delaware shields this information.
Delaware simply requires company owners to disclose the entity name and the name and address of the LLC’s registered agent when submitting formation paperwork. There is no need to provide any information about the members or management.
While this is an appealing perk for many, it is degraded if you conduct business outside of Delaware. What good are Delaware’s privacy protections if you have to register as a foreign company in a state or jurisdictions that do not provide the same degree of protection? In this case, you are paying Delaware $300 each year for protection that you are unable to enjoy.
4: Delaware’s Court of Chancery is unlikely to hear your case.
The presence of a Court of Chancery is one of Delaware’s most distinguishing traits. This court was created exclusively to handle corporate legal issues, and the judges who sit on it specialise in corporate law and hear cases without juries, producing an especially favourable business atmosphere.
This court, like all of Delaware’s business-friendly policies, is an excellent resource for Delaware LLC owners who live and work in the state. However, access to the Court of Chancery is not assured for firms incorporated in Delaware but operating overseas.
According to a 2018 decision by the Delaware Court of Chancery, “the mere establishment of a Delaware company, without more, is inadequate for this Court to exercise jurisdiction.” Businesses must often demonstrate a greater substantial relationship to the state than just being created there in order to initiate suit in the Court of Chancery.
5. The Delaware tax rate only applies to income earned within the state.
Although not often a determining factor in forming an LLC in Delaware, the state’s lower-than-average personal income tax rate may be perceived as an advantage to residents of high-tax jurisdictions like as California or New York.
However, taxes are required where your money is earned, not where your firm is registered. For example, if you incorporate an LLC in Delaware but make all of your money in California, your earnings are liable to California income tax. There is no way avoiding paying taxes in the states where you operate, no matter how appealing the tax system of another state may seem.