When forming a business in the United States there are a lot of decisions to make. This might include deciding the name, how you prefer to file taxes, and especially how you plan to form your entity.
With various options on how you plan to form your entity, it can be difficult to know which is right for you. Typically when forming a business you have a few main options, form as a sole proprietorship, partnership, LLC, or corporation. There are both positive and negative aspects to all of these formations, but the limited liability company is known as the most protective.
What is an LLC?
The LLC is a business structure in the United States. After the formation of an LLC, the owners are not personally responsible nor liable for the debts of the company. Known as a hybrid of the other three formations.
Advantages of an LLC in Delaware
Limited Personal Liability
The most common reason that a business might form as an LLC is to avoid personal liability. This is important especially when you are either a sole proprietorship or a partnership. In this case, you and your business are considered one and the same. If you do not form an LLC then if the event business debts occur, you may eventually be liable for them.
Your personal liability is also limited when forming an LLC in terms of legal issues. If your business partner makes a legal mistake then your personal assets will never be at risk. Overall, an LLC limits your personal liability and keeps your business assets completely separate from your personal life.
Rather than be forced into a certain method of taxation, forming as an LLC in Delaware allows you to decide how you want to be taxed. LLCs do not have their own federal tax classification, which means that you can be taxed in the same method as a sole proprietor, partner, or corporation.
Being able to elect taxation gives you great power. Rather than being forced to pay corporate taxes, you can choose “pass-through” taxation. This means that all of the income which passes through your LLC will be taxed on your personal tax returns.
Typically in a partnership or corporation situation partners or shareholders are required to split the profits according to ownership. In some cases, you may not want to agree to this because one of you puts in more work than the other. An LLC allows you to legally distribute the profits however you like.
LLCs can also have as many shareholders as they choose. Rather than be forced into having less than 100 shareholders or all members being citizens of the United States (such as with some corporations), these rules do not apply to LLCs. This flexibility is also seen in how an LLC does not have a formal structure. You can decide how you want to run your business without additional constraints or rules.
When forming an LLC you can choose to do so anonymously. This is done by electing a person in the state of Delaware as the registered agent. This person will be required to accept documents on your behalf, but it will keep your name separate from your business.
Disadvantages of Forming an LLC in Delaware
- Payroll or self-employment taxes
- Not all professionals are allowed to form as an LLC
- Each transfer of membership requires the consent of all owners, can slow down transaction times
- Single-member LLCs do not have as much asset protection as standard LLCs
Who Should Start an LLC in Delaware?
Some professions choose to operate as a professional LLC. This might include a lawyer, architect, engineer, or accountant. This is because often forming an LLC is the best option to reduce liability. Not only does an LLC allow all members of the business to work together in managing the company, but they also allow you to elect how you want to be taxed. This can facilitate the ability to save more on taxes in the future. If you want the benefits of a corporation with the taxation of a partnership or sole proprietorship, an LLC is a great decision.
How a Business Lawyer Can Help
There are many benefits of an LLC, but ultimately you will need to decide which formation is right for you. Using the help of a business lawyer can facilitate an easy process and formation as a limited liability company. We can help you understand the guidelines and requirements of forming an LLC in Delaware. Contact us today to learn more.