Delaware LLC Benefits: A Complete Guide for Sole Proprietors
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Are you a sole proprietor evaluating which state is best to form your single-member LLC? Read to learn the benefits of a Delaware LLC.
Are you an independent contractor or self-employed sole proprietor with a growing business and interested in researching how to create a single-member LLC?
With that said, through your research have you come across a lot of mentions of Delaware being the best state to form an LLC?
If you answered, yes, you’ve come to the right place.
At Falcon Expenses (the company that publishes this blog) we’re familiar with the challenges of evaluating the most appropriate state to form a single-member LLC. Especially, evaluating which single-member LLC supports the needs of a one-owner business. This is because recently we went through the same process you’re going through right now.
In this article, we go over the benefits of forming a single-member LLC in Delaware. In addition, in this article, we provide you with all the resources you need to form a single-member LLC in Delaware.
So keep reading.
What is an LLC?
An LLC is a Limited Liability Company. A Limited Liability Company is the simplest of all legal business entities offered in the United States. The business structure, and legal entity, of an LLC is the most ideal structure for most small businesses. This includes small businesses such as growing sole proprietorships that need a more robust business structure to support their growing business. An LLC provides a one-person-owned business with the liability protection and separate legal entity distinction needed for a growing business.
What is a single-member LLC?
A single-member LLC is a Limited Liability Company that only has one owner. Owners of LLCs are known as members.
Why is Delaware a Good State to Form an LLC?
Delaware is often considered a good state for forming a single-member LLC for single-member LLCs that might face complex legal issues. This is because Delaware’s business courts see most of the complex legal cases and therefore, has the most case law to draw from. Delaware is typically the most popular state to incorporate for companies seeking more complex legal structures, such as C Corps, and complex partnerships. If you’re a small business owner, looking to incorporate a business. with less complex needs some other states for incorporation might be worth considering, such as Nevada or Wyoming.
Delaware LLC Benefits
Business-friendly legal system
Delaware provides the best legal protection for shareholders and directors. Therefore, depending on the nature of your business, this might be necessary.
Asset protection laws and limited liability
An LLC is considered a separate legal entity from its owners. Of course, if it’s formed properly. Delaware offers members and owners of LLCs formed in its state a high level of liability protection.
What does this mean?
This means that your Delaware LLC is responsible for its own debts and liabilities. Not the owners. Therefore, if your Delaware LLC takes out a small business loan and misses a few payments, the bank can’t go after your personal assets to collect the money.
In addition, a properly formed LLC has its own tax ID number.
Low startup costs
The costs to form an LLC, including a single-member LLC, in the state of Delaware is one of the cheapest compared to other states. The initial formation filing fee to start a Delaware LLC is $90. Also, if you’re in a hurry to form your single-member Delaware LLC, for an additional $100 you can get same-day service. This expedited service is not available in other states that have appealing benefits for LLCs, such as Wyoming.
Perpetual life
An LLC is a separate legal entity. Therefore, your single-member Delaware LLC will continue to exist if and until it’s dissolved. A sole proprietorship typically ends when it’s owner passes away. Therefore, with a Delaware LLC you can build a brand that will last well into the future and can be passed down to future generations.
Build credit & raise capital
A Delaware LLC is an independent legal entity. Therefore, a Delaware LLC has its own tax ID number, which means your Delaware LLC can build its own credit. A single-member Delaware LLC builds credit by opening its own bank account, taking out small business loans, or selling equity to raise money. There are many benefits of a small business bank account. Even sole proprietors should have a small business bank account.
Owner privacy
In the State of Delaware LLC ownership is not public record. Delaware is one of the four states in the United States that allows LLC owners to remain anonymous, this includes single-member LLCs. Therefore, small business owners that want to maintain a low profile should consider this benefit of a Delaware LLC. Delaware LLCs offer some of the highest levels of confidentiality. For example, not even the members or managers, or information about Delaware LLC members or managers is required to be listed on the Certificate of Formation of a Delaware LLC.
Ownership transferability
The ownership of an LLC is transferrable to another person. This is because an LLC is a separate entity from its owner. However, the ownership of a sole proprietorship cannot be transferred because the owner and the sole proprietorship are one and the same.
Unlimited number of owners
This article is aimed at helping sole proprietors, which by definition are one-person-owned small businesses, form a single-member LLC in Delaware. However, it’s important to note that one of the benefits of a Delaware LLC is that it can have an unlimited number of business owners. Therefore, a Delaware LLC provides an appropriate business structure to support your business’s growth if you plan on expanding your business, take on equity investors, or adding partners or owners.
No citizenship requirements
You don’t need US citizenship or US residency to form a Delaware LLC. Therefore, you should have no problem forming a Delaware LLC, if you’re an American abroad, such as a globe-trotting freelancer. In addition, if you don’t have American citizenship at all and you stumbled upon this article and were wondering if you can form an American Delaware LLC without US citizenship, the answer is, yes.
Delaware LLC Cost
To form an LLC in Delaware, including a single-member LLC, the cost of formation is only $90. This is one of the lowest in the United States. However, searching for a state with the lowest LLCformation costs shouldn’t be your primary concern, especially if the difference between one state and another is only $10 to $50.
The cost of an LLC adds up when it comes to annual fees. Some of the minimum annual taxes fees you might be required to pay, depending on the state, when you have an LLC are:
- Minimum tax
- Franchise tax
- Annual report filing fees
- Business license fees
The formation costs of a Delaware LLC are one of the lowest in the entire United States. This is appealing to small businesses where keeping costs and expenses low are of great importance. However, the formation costs are just a one-time fee.
The minimum cost of maintaining a Delaware LLC $300 per year. Delaware charges a minimum annual tax of $300 to maintain your single-member LLC. There is no requirement to file an annual report in Delaware for a Delaware LLC.
How are single-member LLCs taxed in Delaware?
This is a very important note to read if you are investigating the formation of a single-member Delaware LLC.
According to the Delaware Division of Revenue,
“Delaware treats a single-member “disregarded entity” as a sole proprietorship for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the State of Delaware.”
Essentially, what this means is that your Delaware single-member LLC won’t pay income tax itself. Meaning your single-member Delaware LLC won’t pay business income tax. However, the income that your single-member LLC earns will pass through directly to you, and be considered personal income, which could be subject to income tax. Please consult with an accountant to determine if given these facts you will be liable for income tax in the state of Delaware.
Delaware Single-Member LLC
How to Start a Delaware LLC
Starting a Delaware LLC is easy. Follow these simple steps to start your single-member Delaware LLC.
It takes six simple steps to create a Delaware LLC. Keep reading to learn about each step.
Step 1: Pick a name for your LLC
Step 2: Choose a Delaware registered agent
Step 3: Get a Delaware Business License
Step 4: File a Certificate of Formation
Step 5: Get an EIN
Step 6: Create an Operating Agreement
How to start a Delaware LLC, Each Step Explained
Step 1: Pick a name for your LLC
This is the fun part. As a sole proprietor, you’ve been limited to the brand name of your surname (unless your state offers a DBA). With a single-member LLC, you get to choose your brand name, and it can be anything, not just your name. For example, if you’re a graphic designer you could call yourself something like Elephant Designs.
However, first, make sure your business brand name is available in the state of Delaware. Otherwise, you might have to register a DBA for your LLC if your top-choice name is already taken.
Step 2: Choose a Delaware registered agent
When you form an LLC in any state that is different from your home state, even if you’re living abroad, you need a place to receive mail in the state where your LLC was formed. Therefore, if form a single-member LLC in Delaware you need a registered agent in Delaware.
What is a registered agent?
A registered agent accepts tax and legal documents for your business. A Registered agent is either a business entity or an individual. A registered agent is also known as a statutory agent or a resident agent.
A registered agent in Delaware costs a nominal fee of as low as $50 a year. The cost of the registered agent depends on the services that you need and can go up to as high at $300 a year for more complex needs.
Step 3: Get a Delaware Business License
According to the Delaware Division of Revenue,
“Any person or entity conducting a trade or business in the State of Delaware, including corporations, must obtain a State of Delaware Business License from the Delaware Division of Revenue.”
To obtain a Delaware business license:
- Visit Delaware’s One Stop Business Licensing and Renewal service; or
- Complete and remit the Delaware CRA
- or call (302) 577-8778 to obtain one via mail
An LLC is an entity, a legal business entity, so a Delaware business license is required. A Delaware business license costs $75 per year. But this price can vary depending on the circumstances so please check.
Step 4: File a Certificate of Formation
A certificate of formation is also known as an Articles of Organization. Many states call this document an Articles of Organization.
Step 5: Get an EIN
Some sole proprietors already have an EIN. You need a new EIN for your single-member Delaware LLC. An EIN is a federal tax ID number like a Social Security Number.
What is an EIN?
An EIN is a 9-digit number issued by the IRS and used by the IRS for tax reporting. It looks like and is very similar to a Social Security Number. However, instead of being used for an individual to be identified by the government and to file their taxes, it is used for a business.
Step 6: Create an Operating Agreement
LLC’s are formed under state laws. Therefore, the requirements to have an operating agreement vary from state to state. Some states require a written operating agreement. The state of Delaware requires an operating agreement.
What is an Operating Agreement?
An Operating Agreement describes the operations of an LLC and describes the agreements between an LLC’s owner. The purpose of an Operating Agreement is to govern your LLC’s internal operations specific to the needs of the owner(s).
Articles of Organization vs Operating Agreement
Are you evaluating an LLC and confused about some new LLC terms and concepts such as Articles of Organization vs Operating Agreements?
If you answered, yes, then keep reading.
An Articles of Organization and Operating Agreement are two legal documents associated with Limited Liability Companies (LLCs). Sometimes people get them confused or don’t even know what they are to begin with.
Articles of Organization is a legal document at the state level that informs the state of your plan to establish and run an LLC. An Articles of Organization is required in each state.
However, an Operating Agreement is not required in all states. An Operating Agreement details how your LLC operates, it is the LLC’s version of corporate by-laws that are used for more complex legal business entities such as C Corps.
Do I need a new EIN to convert to an LLC from a sole proprietorship?
Yes! You need to get a new EIN number if you already have one for your sole proprietorship. In most cases, you cannot use the EIN you have been using for your sole proprietorship.
Want to start an LLC in California?
Learn how to here: How to start an LLC in California
Do I need to open a new business bank account if I convert to an LLC from a sole proprietorship?
No. If you already have a business bank account most likely they will let you update your business account to reflect your entity change. Our advice is to contact your bank and check
Conclusion
Delaware is a choice for sole proprietors that are switching entities to a single-member LLC, or even a multi-member LLC that have the potential for complex legal issues.
Falcon Expenses Blog is a community of freelancers, self-employed sole proprietors, and small business owners. Our community would love to hear your story.
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Was the process challenging or straightforward?
What state did you choose to form your LLC and why?
Please share your answers in the comments below. Our community could really benefit from your story.
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I used to travel a lot for work. Doing my expenses frustrated me. I would delay submitting them and when I did, I would spend hours taping receipts to paper to scan for my boss. I knew there was a better solution, and I had a background in productivity software, so I created Falcon Expenses. I enjoy creating software that makes people’s lives easier.
In addition, I’m an avid skier and I enjoy hiking, sailing, and cooking.
