Should I Form My LLC in Delaware

by Legal Goodness July 05, 2024

When starting a business, one of the first decisions you’ll need to make is where to form your Limited Liability Company (LLC). Business owners often hear that forming in certain states, like Delaware, is more advantageous than forming an LLC in their own state.

This is not necessarily true for small business owners or those just starting out.

While certain states such as Delaware, Nevada, or Wyoming are considered "business-friendly" it may be more work than it's worth.

Let's look at why:

Registering Twice

If you register your LLC in a state other than where your business is located, you typically need to also register your entity in its home state too, that is where it is actually located.

This is usually called a "Foreign LLC" registration because it is not the first registration of the entity.

So, in addition to the paperwork or online submission you're required to submit for the first registration, you'll go through a similar process in your home state.

For example, if you form an LLC in Delaware but operate in California, you’ll need to file formation documents in Delaware and register as a foreign LLC in California.

This means double the filing fees, double the annual reports, and double the compliance requirements.

Extra Fees

Aside from the initial formation fees, you’ll also incur costs for maintaining your LLC in both the state of formation and your home state.

Certain states, such as Delaware, charge an annual franchise tax that LLCs must pay.

You'll also be responsible for registered agent fees (if you use an outside agent), and the cost of filing additional documentation in both states.

More Maintenance

While managing an LLC is generally far less maintenance than managing a corporation, it still requires upkeep with each state registration.

Many states require annual registrations which would affect your foreign LLC status. With annual registrations, you inform the state of any changes to your LLC such as adding or removing members or a change of address.

You'll need to remember to submit your foreign annual report in addition to logging in yearly to pay your annual franchise tax to Delaware.

Jurisdiction Friction

If your business faces legal issues, such as lawsuits, you may have to navigate the judicial systems of both the state where you formed your LLC and the state where you operate.

This can complicate legal matters and potentially increase legal costs.

Courts in your home state may also be less inclined to apply the favorable laws of your LLC’s formation state, leading to uncertainty and potential legal challenges.

Is it Beneficial?

Large corporations often choose to incorporate in Delaware due to its business-friendly legal environment.

Investors, particularly venture capitalists, prefer Delaware corporations due to well-established corporate governance practices and legal protections.

However, for small businesses these advantages for larger entities may not translate into meaningful benefits for a small LLC.

Instead, the additional administrative burden and costs can outweigh any potential gains.