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:
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.