Last updated May 30, 2020

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6 Reasons Why You Shouldn’t
Form an LLC in Delaware

How to form an LLC in Delaware
This Quick Start Guide is a brief overview of how to form an LLC in Delaware.

Detailed Lessons:

 

Delaware LLC costs:
LLC formation cost: $90 (one-time fee)
Annual franchise tax: $300 (every year)

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6 Reasons Why You Shouldn’t Form an LLC in Delaware (for U.S. residents)

Video Transcript:

Hey folks, Matt Horwitz, LLCUniversity.com. Six reasons why you should not form an LLC in Delaware. I just got finished writing this and figured it would be an excellent piece to make a video on, and we get so many phone calls. This is such a pain point for so many people, and they make a lot of mistakes here. Note if you live in Delaware or you do business in Delaware, this information does not apply to you, you should form an LLC in Delaware. If you don’t live in Delaware and you don’t do business in Delaware, and you’ve heard that you should form an LLC in this magical state, let me save you a lot of money and headaches. Don’t form an LLC in Delaware. The disadvantages of forming an LLC in Delaware far outweigh the perceived advantages. Let’s look at an example. Nathan is from Connecticut. He reads online that Delaware is the best state to form an LLC in, so he forms an LLC in Delaware. He’s a resident of Connecticut, he already pays taxes in Connecticut, and his home office is based in Connecticut. Most people aren’t aware of, but there’s a lot of issues with this setup, illegally transacting business without authority. Nathan’s Delaware LLC is doing business illegally in Connecticut. The Connecticut secretary of state is going to enforce it’s laws and will soon be sending Nathan a citation in the mail with a fine, so he needs to register as a Foreign LLC. To remedy the citation and because it’s the law, Nathan must now- It’s hard to read your own writing. Nathan must now register his Delaware LLC as a Foreign LLC in Connecticut. He needs to file a Connecticut Foreign LLC registration, pay the state filing fee, which is $120 in Connecticut, it’s a lot more expensive in other states. Then he must keep this Foreign LLC in compliance with Connecticut law. That means filing an annual report every year and paying that fee, as well as paying a Connecticut business entity tax of $250 every other year. Remember, this is already on top of him paying the $90 registration fee in Delaware, the $300 required annual franchise tax in Delaware, and $125 every year for his Delaware registered agent. In short, Nathan now needs to maintain two LLCs. He has a Domestic LLC in Delaware and a Foreign LLC in Connecticut, and it gets worse. Nathan was deceived into forming a Delaware LLC because he read it was a tax friendly state, and while this is true, it really only applies to large, multi-million dollar companies and not small business LLCs. Look, don’t just take our word for it. Read what the Delaware secretary of state has to say about the hype … I guess you can’t click the link, but the link is below the video. Most people are unaware of this simple fact, taxes are paid where the money is made, not where your LLC is set up. That means Nathan still owes Connecticut taxes, which could include but aren’t limited to sales and use tax, business entity tax, withholding tax, corporate business tax, net income tax, franchise tax, property tax, and more. Remember, Nathan’s a resident of Connecticut and an LLC is a pass through entity, which means the profits of the LLC are reported on his federal income tax return, as well as his Connecticut personal income tax return. In short, the whole reason that he formed the Delaware LLC in the first place is defeated. It’s not saving him any money on taxes. In fact, this whole loophole is unknowingly costing him a lot more money. What about the Delaware Court of Chancery and Delaware Law? I’m sure you’ve read online something about these. The Delaware Court of Chancery is the oldest and most established business court in America, and Delaware has the most robust business case law. Who cares? What are you starting, some lawsuit rampant company where you’re going to go to court every other month? Look, take your reality check. Not that this information is not true, it just doesn’t apply to you. Again, take a reality check. Most of the companies promoting Delaware, they don’t give a crap about your business’s long term success and well being, and all the headaches that you’re going to have to deal with. 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 in. Whew… alright, I get a little angry here. Other industry related issues. Again, we get painful phone calls from our readers about these issues. Recently, a guy from Pennsylvania running a trucking company in Pennsylvania formed an LLC in Delaware. Later, he tried to register his trucks as being in Delaware with the department of transportation. They denied his application because he was not a resident of Delaware, and that ended up costing him $20,000 of business that month. I’m not going to list out dozens and dozens of examples here, but I just want to let you know. This information, you’re not going to find on websites promoting Delaware, and you’re probably going to hit industry specific quirks where you’re going to have issues with your out of state LLC. All right, take away. Instead of 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 two states, having tax liabilities potentially in two states, and dealing with the headaches of two LLCs, just form the LLC in the home state and the state where you’re doing business. If you’d like more information on this whole topic, we have another video, link below. Here’s an excuse I hear, “But I work online!” Even if you run a business from home or online, you’re still a resident of your home state and you’re still transacting business in that state. You can’t get around your state’s tax obligations simply by forming an LLC out of state. If you really want to, you’ve got to move. Again, put your time and energy into building a successful company, not wasting your time on a handful of loopholes you’ve read on the internet. Again, if you live in Delaware or you do business in Delaware, just please disregard this, form an LLC in Delaware. If not, form your LLC in your home state and/or the state where you’re transacting business. Hope this information is helpful. Take care.

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…

Illegally Transacting Business Without Authority

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: http://corplaw.delaware.gov/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.”

Who cares!

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.

Other Industry-Related Issues

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.

Takeaway

Instead of:

– 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.

Matt Horwitz
Founder & Educator, LLC University®
Forming an LLC shouldn't be so complicated. Our step-by-step guide will make the process a breeze – and no complex legal jargon! LLC University® teaches people how to form an LLC for free in all 50 states. We hope you find our free guides and resources helpful in your business journey.
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