Not a Key Strategy: Forming LLC’s in Delaware

Delaware LLC

There was, and may still be, a trend that motivated investors to form their companies in Delaware, or, if they weren’t already there, to move their companies to Delaware. So many people ask: Should we start our company in Delaware?

The short answer is: NO

A key consideration should be where you conduct business. If you live in Washington State, do business in Washington State, have investors in Washington State, and work with clients in Washington State, then why would you form a business in Delaware? On the other hand, if you live in Delaware, or do business in that state, then sure, form an LLC there.

Practically, forming a business in Delaware when you don’t work or live in Delaware can come with disadvantages that create administrative and financial burdens.

By way of example, if you have formed your LLC in Delaware, but currently reside in another state, you cannot do business in your “home state” unless you register your Delaware LLC as a “Foreign LLC” in your home state. First, however, you would need to pay that state filling fee for the Foreign LLC license as well as file a yearly annual report. You would also need to pay a Delaware business entity tax every other year. Beyond these fees, you would also need to pay taxes in both Delaware and in your “home state”. Taxes are always paid where the money is made, and even with Delaware’s “tax-friendly state” incentives, these lower taxes only apply to revenue generated in Delaware—not revenue generated in other states.

This is the cost of maintaining two companies in two different states, which makes sense if your business is national or international, but not if your business is centered in a state or can work nationally just as well from one state as from Delaware.

People argue that the Delaware Court of Chancery and the familiarity and company friendliness of Delaware law is worth the switch, but in reality, most companies hope to never litigate with their investors and never will. If you are planning a litigation spree or think you might be subject to litigation soon, perhaps incorporating in Delaware is worth considering. However, most mediators, arbitrators, judges, and state law is now well formed in your “home state”.

Most companies interested in incorporating or moving their company to Delaware, are simply interested in taking the fees that come along with the process. At Gravis Law, PLLC, we focus our time and energy on supporting client transactions that build and protect asset value. If you would like to speak with an attorney today about getting started on your LLC’s taxes or to discuss how we can support you through the process, please give us a call at (509) 844-9300.

By: Claire Cox and Joshua Bam

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