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Note: If you live in Delaware, or do business in the state, then this information does not apply to you. You should form an LLC in Delaware.
If you don’t live in, or do business in Delaware, and you’ve heard that you should form an LLC in Delaware, let me save you a lot of money and headaches: you should not form an LLC in Delaware.
The disadvantages of forming an LLC in Delaware far outweigh any “advantages” you may have read.
Let’s look at an example:
- Nathan is from Connecticut
- He read online “Delaware is the best state to form an LLC”
- He forms an LLC in Delaware
- He is a resident of Connecticut
- He already pays taxes in Connecticut
- His home office is in Connecticut
Most people are unaware, but there are a handful of issues with this setup…
Nathan’s DE LLC is doing business illegally in CT. The CT Secretary of State enforces its laws and will soon be sending Nathan a citation and a fine in the mail.
Needing to Register a Foreign LLC
To remedy the above citation (and because it’s the law), Nathan must now register his DE LLC as a “Foreign LLC” in CT.
He first needs to file a Connecticut Foreign LLC Registration and pay the state filing fee ($120). He must then keep his Foreign LLC in compliance with CT law. That means filing a Connecticut Annual Report every year ($20), as well as paying the Business Entity Tax ($250) every other year.
Remember, this is on top of already paying the $90 filing fee in Delaware, the $300 required Annual Franchise Tax in Delaware, and the $125 annual fee for his DE Registered Agent.
In short, Nathan now needs to maintain 2 LLCs. A “Domestic LLC” in Delaware and a “Foreign LLC” in his home state of Connecticut.
It gets worse…
Taxes Are Paid Where Money is Made
Nathan was deceived into forming an LLC in Delaware because he read it was a “tax-friendly state”.
And while this is true, it really only applies to large, multi-million dollar Corporations, not small business LLCs.
And don’t just take our word for it. Read what the Delaware Secretary of State has to say about the hype:
Delaware Corporate Law: Facts and Myths
Most people are unaware of this one simple fact: taxes are paid where the money is made.
That means Nathan still owes Connecticut taxes, which could include (but are not limited to) sales and use tax, business entity tax, withholding tax, corporate business tax, net income tax, surtax, franchise tax, property tax, and more.
And remember, Nathan is a resident of Connecticut. And an LLC is a pass-through entity. Which means the profits from his LLC are reported on his federal income tax return, as well as his Connecticut personal income tax return.
In short, the whole reason he formed the DE LLC is defeated. It’s not saving him any money on taxes. In fact, this whole “loophole” is unknowingly costing him a lot more money.
But What About the Delaware Court of Chancery and Delaware Law?
I’m sure you’ve read something along these lines: “The Delaware Court of Chancery is the oldest and most established business court in America,” and “Delaware has the most robust business case law.”
What are you starting: some lawsuit-rampant company where you’re going to court every other month?
Take a reality check. Most of these companies promoting Delaware don’t give a crap about your business’s long-term success and well-being. They just want your money.
Don’t be misled into the headaches. Focus your energy on running a legitimate and successful company in the state where you actually live and do business.
We get painful phone calls from many of our readers about these issues. Recently a man from Pennsylvania who runs a trucking company (in PA) formed an LLC in Delaware.
Later, when he tried to register his trucks with the Department of Transportation, they denied his application because he was not a resident of Delaware. This ended up costing him over $20,000 in business that month.
Instead of listing out dozens of other examples, we just want to warn you that you’ll likely hit industry-specific “quirks” with LLCs registered outside the state where you reside and/or actually do business.
- forming an LLC out-of-state and then later learning that you need to register your out-of-state LLC as a Foreign LLC in your home state,
- paying for an extra Registered Agent,
- paying annual reports in 2 states,
- having tax liabilities in 2 states,
- and dealing with the headaches of maintaining 2 LLCs,
just form your LLC in your home state, or the state where you are doing business. If you’d like more information on why it’s best to form an LLC in your home state, please see this video.
“But I Work Online!”
Even if you run an online business from home, you are still a resident of your home state and you are still transacting business in that state. You cannot get around your state’s tax obligations simply by forming an LLC out-of-state.
Put your time and energy into building a successful company, not wasting your time on a handful of “loopholes” you read on the internet.
If you live in, or do business in Delaware
Then this article does not apply to your situation. You should form your LLC in Delaware. Get step-by-step instructions on how to do that here: How to Form an LLC in Delaware.
Delaware Secretary of State: Delaware Corporate Law Facts and Myths
Uniform Law Commission: Don’t Dabble in Delaware
Attorney Alexander J. Davie
Attorney Dana H. Shultz
DELAWARE LLC GUIDE
Follow the lessons below to form your Delaware LLC.
188 comments on “6 Reasons Why You Shouldn’t Form an LLC in Delaware”
Disclaimer: Nothing on this page shall be interpreted as legal or tax advice. Rules and regulations vary by location. They also change over time and are specific to your situation. Furthermore, this comment section is provided so people can share their thoughts and experience. Please consult a licensed professional if you have legal or tax questions.
Thank you for the good work you do here, my question is that I currently reside in West Virginia but will be relocating later in the year to Pennsylvania. I am about to register my LLc, where do you suggest to register. I will be here in in west Virginia for six more months before moving to Pennslvannia. I am hoping not to have to deal with foreign LLc issue.
What do you recommend.
Hi Niyi, you’re very welcome. If it were me, I’d just form the LLC in Pennsylvania and not worry about registering anything in West Virginia.
Thank you for the amazing articles!
I did that mistake and now I dont know what to do. I live in Boston MA and I formed an LLC in delaware My business is purely online, all i do is sell ebooks and affiliate marketing. I will be moving to California soon but I don’t know when exactly yet. What should I do? Wait till I move to California? If I could keep my LLC in delaware that would br the best option as I move a lot.
Hi Sophia, you’re very welcome. If you move a lot, it is worth considering keeping your Delaware LLC and then registering it as a foreign LLC in California when you move there. Then when you leave California, withdraw that foreign LLC filing (you’ll need to file a final CA LLC tax return) and foreign qualify in the new state, and so on. Keep in mind, that each time you foreign qualify your LLC in a state, you’ll need to adhere to that state’s LLC requirements. For example, in order for your Delaware LLC to register as a foreign LLC in California, you’ll need a Registered Agent in California. You’ll also need to file a California LLC Statement of Information and pay California LLC franchise tax and file Form 568 every year. It’s best to work with an accountant on that. Hope that helps.
Thank you so much, Matt. You are the best. It seems to be a lot of trouble and paperwork. Do you think it’s better to close my Delaware LLC and start all over with opening/closing my company depending on the state I’m in? My business is online with very little revenue. I feel like it’s really hard for small companies to thrive with all this paperwork and legal obligations.
Hi Sophia, you’re very welcome. Yes, I hear you. There is a lot of paperwork and a bit to learn about. It gets easier over time. It might be less of a headache in the long run if you Dissolve a Delaware LLC. It then might be a good idea to wait until you know where you are moving to and then form the LLC once you are certain. Forming an LLC in California is something you’d only want to do if you were certain you were going to move there as the LLC annual fees are high ($800). Hope that helps. Let me know if you need anything else.
I formed my llc for a character entertainment business in 2019 in Delaware on the advice of Corporation Service Company (which I now know is kind of a scam). We are based in North Carolina and do events in North Carolina, South Carolina, and Virginia. I’m switching and getting a more reputable registered agent and my question is what do you advise I do next? Can I move my llc to North Carolina? 80-85% of our business is in North Carolina. When I file taxes will I need to pay in South Carolina and Virginia too? We pay the normal $300 annual fee to Delaware too. I really appreciate the help. I feel like I am drowning.
Hey Lauren, we’ll help you sort through this LLC “clean up”. What kind of events do you do in South Carolina and Virginia? Do they occur regularly and repeatedly and is business being done there? Typically there are 3 ways to “move” an LLC, however, because of North Carolina, there are only 2 ways (domestication isn’t allowed). Do you want to retain the LLC’s history, such as keeping the EIN and the LLC’s bank account? If those are important to you, are okay with paying some extra annual fees or do you need the most affordable route possible?
Thanks for the reply. I have been stewing over this FOREVER and it’s roadblocking me. You’re like a business therapist. I need to be right and get as close to what I want to achieve as possible.
I am going NY LLC based on your response.
So to recap
“Delaware and New York do not list Members or Managers in the initial LLC filing”
I will hire a registered agent, who do you recommend. I need to control my annual costs.
Who do you recommend fill the LLC Organizer role if not me.
If it is not me, how do I establish bank accounts for the new entity if I am not on the documents? My new business will have no credit. I have seed money to establish accounts.
Chase sucks, they fee you to death.
Where do most startups do their banking?
DB, I hear you! I’ve spent months on stuff like this. I recommend using Northwest Registered Agent. They’ll serve as the Registered Agent for the LLC and they can form the LLC for you as well. They can use their address throughout the entire New York LLC Articles of Organization. Their address is in Albany, so you can use that address and publish your ads in Albany county, too. You can call Northwest before placing the order to confirm everything. That may help calm the nerves and you can go over any details.
Regarding the LLC bank account, Northwest will provide you with an Initial Resolution, which serves the same function as a Statement of LLC Organizer (them stepping down as Organizer and listing you as Member). However, your membership is official memorialized in the New York LLC Operating Agreement. Meaning, it’s not the Initial Resolution that makes you a Member. It works like this: you make yourself a Member by deciding to be the member of a soon-to-be-formed LLC. You authorize the Organizer to file the Articles of Organization (by hiring them). Then you memorialize all this in the LLC Operating Agreement. However, bank tellers don’t know all that lol. So the Operating Agreement + Initial Resolution help ;)
Personally, I’ve used TD Bank, Wells Fargo, Santander, and Bank of America for business banking. I have no complaints about the first three. I think BOA customer service generally isn’t great. Most banks have 2-3 “levels” of business checking accounts. We recommend just starting with the most basic. There are usually no monthly fees if you keep the minimum balance. It’s usually $500 – $1,500. You could also check out Mercury for an online bank. They don’t have fees (just some wire fees). Hope that helps :)
I was looking at a Delaware LLC until I ran across your website. I am an Internet/Software/Hosting/Ad-tech business with personal residence in NYC (of all places! Hello tax). I need and I am seeking the most confidential formation of an LLC I can achieve.
My business model will likely transact business interstate on a regular basis. Currently, all servers and assets are in NY.
I am not looking for confidentiality as a function of bad/illegal business practice. I just want to avoid personal exposure and access to personal information as much as possible (name/information/other).
I also would like to file economically with reasonable reoccurring annual fees. NYC LLC will/may require a publishing cost that I hear is really high plus local tax bla bla bla!
Maybe I should move out of NYC but where?
Hi DB, moving your personal state of residency is a big question. It’s not just only about personal state income tax, but what other taxes exist. What about sales tax. Do you like the weather, cost of living, proximity to friends and family, proximity to things you like, travel/transportation, and at least a dozen other things to think about ;)
Please see our New York LLC publication requirement page. You can publish in Albany and save upwards of $1,000.
If you form an LLC in Delaware, but are doing business in New York, the Delaware LLC will need to register as a foreign LLC in New York.
If you are looking for privacy, both Delaware and New York do not list Members or Managers in the initial LLC filing (the Articles of Organization). However, you’ll want to hire a Commercial Registered Agent for address privacy and you’ll want to hire someone to form/register your LLC(s) so that they sign as the LLC Organizer or Authorized Person. You’ll also want to hire someone to file the New York LLC Biennial Statements (for the same reason). The Delaware LLC Franchise Tax, while an annual requirement, doesn’t go on public record. Hope that helps.
I have a question. I spoke with a lawyer on the phone who highly recommended that I open an LLC in Delaware to maintain anonymity to buy properties. The reason why he recommended Delaware is because it has a court system streamlined to deal with business matters in comparison to New Mexico (poorly functioning business court system according to lawyer) or Wyoming. My only gripe with Delaware is the $300 yearly fee. In comparison to the $50 yearly fee for New Mexico. However, I have no intent to conduct business just buy property and stay anonymous. So it is better to go to New Mexico and save $250 a year. Or pay to have an LLC in Delaware for $300? At the end of the day my main concern is remaining anonymous from people snooping for info on Google.
Hi Jen, I recommend speaking with a few other attorneys, especially those located in New Mexico. You received incomplete information. If you form an LLC in Delaware and that LLC is doing business in New Mexico, the Delaware LLC needs to register as a foreign LLC in New Mexico. Additionally, you’ll want to ask about “conflicts of law”. Your LLC is most likely to be sued in New Mexico because that is where it’s doing business. Therefore, New Mexico law is most likely to apply and not Delaware.
Regardless of whether you form an LLC in Delaware, form an LLC in Mexico, do or don’t foreign qualify… or if you form a Delaware LLC that owns New Mexico LLCs (something to consider… however, you’ll want to contrast that with owning an LLC in your home state that owns New Mexico LLCs), they can all be done privately. Neither Delaware nor New Mexico require Members or Managers to be listed in the public filing (DE: Certificate of Formation; NM: Articles of Organization). And New Mexico LLCs don’t have an Annual Report. And the Delaware Annual Franchise tax, while an annual requirement, doesn’t publish any information about franchise tax publicly.
You’ll want to hire a Commercial Registered Agent for your LLC(s) and hire a company to form the LLCs so they sign as the LLC Organizer and not you. Hope that helps.
I live in Maryland and plan to open two separate e-commerce businesses. A Maryland LLC will be established for each. Should I consider forming a Delaware S Corp to hold ownership in the LLC’s? What advantage would that structure provide?
Hi CDub, this question is best addressed with an accountant. There are a lot of details and things to unpack here. Also to clarify, you wouldn’t form an S-Corp. You actually can’t “form” an S-Corp because it is not a legal entity. An S-Corp is a tax election (aka tax classification). So you would form either a Corporation or an LLC and then that Corporation or LLC would apply for S-Corp tax treatment with the IRS. For more information, please see LLC taxed as S-Corporation. Hope that helps.
Hi. I appreciate the response. I actually understand how a corporation elects IRS treatment. I was being brief and that was at the expense of specificity. I’ll talk to an accountant shortly. Any hints about what I should ask so that the call/meeting is fruitful?
You’re welcome :) Ah, I see. I hope I didn’t come across rude or insulting. I apologize if I did. Initially, I’d make sure the costs of having an S-Corp and running payroll are justified by the net income. Generally speaking, if net income per member is over ~$80k, I personally find it justifiable. If less that say $50k-$60k, I find keeping the S-Corp in compliance and managing payroll and payroll filings are annoying and cumbersome (so a mental/energetic cost in addition to actually fees related to payroll service, bookkeeping, and tax filings). Additionally, I’d look into whether or not the Maryland subsidiary LLCs should be taxed as disregarded entities vs. QSUBs (Qualified Subchapter S Subsidiary). I’d also discuss sales tax filings and compliance. Hope that helps.
Live in Texas. Will have an e-commerce biz w/ customers around the world. We are looking to maximize privacy for partners/owners. So would simply first getting the DE LLC done and then having the DE LLC entity be the sole owner of the TX foreign entity LLC be the best way to do that? So to be clear, privacy is the biggest concern, as this startup could explode and be globally known in the next year or two.
Hi Johnny, yes, that will work. And the Delaware LLC wouldn’t need to foreign qualify in Texas since it’s not doing business in Texas (the Texas LLC is). You can form a Delaware LLC and that Delaware LLC would be listed as a “Governing Person” in the Texas LLC Certificate of Formation. Your Delaware LLC will also be listed as the owner in the Texas LLC Operating Agreement.
Keep in mind that you’ll want to hire a Commercial Registered Agent for both the Texas LLC and the Delaware LLC and you’ll want to hire a filing company to file the LLCs for you so they sign as the LLC Organizer (and not you). For something like this, we recommend using Northwest Registered Agent. They can file the LLCs and provide Registered Agent services in both Delaware and Texas. Hope that helps.
I have been reading your advice from other questions and it is very eye opening! I have a few questions so bare with me. I am in the midst of starting my own Marketing Firm online. I am part of a military family and will be moving to DC in a few months and then again to another state (maybe different Country) every 3 years. What is your advice for someone in my situation? Do I re-register my LLC in a different state every 3 years? Will that affect my company name every time I move states?
In regards to my company, I have a name picked out but not ready to start a business yet. Is the only way to keep my business name from being taken to form a LLC or something similar? If there is a way to register my name without starting a business, any information would be wonderful.
Last question is in the event we move out of the Country – say Japan next, would you recommend I keep my LLC in the last US state I was last stationed? Or what would your advice be if I had clients in the US?
Thank you so much for your time Matt. Your advice is much appreciated!
Hi Michal, thank you for your service! What we recommend for military families is forming an LLC in a “base state”. Meaning, a state where you have the most context (i.e. family connections, driver’s license, voter’s registration, where you file state taxes, where you’d be most likely to return to, etc.). Then from there, you’d register that LLC as a foreign LLC in the states where it’s doing business. When you leave that state, you can withdraw/cancel that foreign LLC registration.
You can file an LLC Name Reservation. This “holds” the name without needing to form the LLC. In most states, the LLC name reservation lasts for 6 months (and can be re-obtained as many times as you’d like). Most people will want to continue using their LLC even after moving overseas, especially with US clients. An exception to that would be forming a Japanese legal entity if you had a business in Japan and there were beneficial reasons to forming a Japanese entity. Hope that helps and thank you for the kind words :)
I heard there is no tax to file in DE if there is no business running from state.. unlike in other states we have to pay tax on LLC just like personal tax.. that is huge advantage
Hi Raghavendra, in what state do you reside and pay taxes? That is where you’ll apportion your LLC’s income and pay taxes. The fact that the LLC was formed in Delaware doesn’t affect personal state income tax. Hope that helps.
I’m importing an expensive restored car to the US and thinking about registering it in Delware under an LLC for tax reasons. I reside in NJ.
Any potential pitfals with this approach?
Hi Mike, import/export isn’t an area we’re familiar with, so we can’t comment on this. Thank you for your understanding. The car sounds awesome!
Hi Matt, I am not a US citizen and I don’t live in the USA. Will a Delaware LLC be beneficial for me? Apart from the annual 90$ (isn’t it?) fees, will I have to pay any taxes if I don’t do business in Delaware? Do I need to show an annual minimum profit? And, are there any complicated documents to hand in?
Hi Kim, US LLCs are very popular among non-US residents. The fee to form a Delaware LLC is $90 (one-time fee). Then every year, the LLC has to pay Annual Franchise Tax. It’s $300 per year. You will also need to hire a Delaware Registered Agent ($100 – $200 per year). No, you don’t need to show any minimum profit. If you are the only owner of the LLC, you’ll need to file Form 5472 with the IRS.
After your LLC is approved, you can get an EIN from the IRS (see How a non-US resident can get EIN for LLC) and open a bank account (see How a non-US resident can open LLC bank account). Hope that helps :)
Thanks Matt, the information you provide here is simply amazing! Thanks again!! :-)
Thanks so much Kim!! You are super welcome :-)
I have a Tax business in Tennessee and we don’t have state taxes only federal taxes. Can I create my LLC in Delaware since we don’t have any state taxes in Tennessee?
Hi Nancy, if you formed an LLC in Delaware, you would still need to register it as a foreign LLC in Tennessee since that is where the LLC is transacting business. The laws of transacting business don’t have anything to do with state taxes. Hope that helps.