Mistakes to Avoid When Forming a Delaware LLC

Entrepreneurs and business people alike have made a surge in popularity for creating a Delaware LLC, owing to the state’s laws with a business-friendly stance, the associated privacy, and the great legal protection.

Nevertheless, there is a set of complexity with the procedure, and trivial errors and omissions are likely to become significant problems in terms of expense and time further down the line.

There are certain errors that new LLC owners frequently make in Delaware and to assist you in avoiding those errors, we have outlined the most important ones.

Consequently, if residents of Delaware know these mistakes to avoid them, they can form a Delaware LLC without too many hassles and most importantly, with confidence.

Certainly! Here’s a more in-depth look at the mistakes to avoid when forming a Delaware LLC:

1. Choosing The Wrong Registered Agent

There must be one and only one registered agent for the LLCs with their presence in Delaware as per the law. In the event of any legal notices and correspondence from the State, it is the agent’s responsibility to act on behalf of the LLC. Should a poor or unqualified registered agent be appointed; their absence or negligence will result in a company’s failure to comply.

If the LLC has a dependable agent, he or she will take care of the timely delivery of all documents received by the corporation and protect the company’s privacy as well as its compliance with the laws of the jurisdiction in which the company is based. In choosing a registered agent, take into consideration customer service, security, and other services that may be useful to the company, including annual compliance services.

2. Ignoring Franchise Tax Obligations

A majority of business owners believe that registering a Delaware LLC gives them a free pass to ignore any local fees as long as they aren’t based in Delaware. This is not true, as every LLC registered in Delaware is required by law to pay annual taxes known as franchise taxes, regardless of their operations.

Failure to make this tax remittance could attract severe consequences like penalties, fines, or even loss of good standing status for your LLC. It is pertinent to remember that Delaware LLCs are subject to the franchise tax on LLCs declared by the State of Delaware for being a domestic LLC registered in the country of Delaware.

The good news though is that this is a flat annual tax fee which comes at a very low cost and would help avoid any complications with regulatory authorities if paid in due time.

3. Using a Personal Address Instead of a Business Address

Delaware LLCs are an easy option for business owners who want to keep their names and personal information private as there are no legal requirements that necessitate the sharing of names of the members of the LLCs. In such cases, sometimes the owners make the mistake of using their address, which shifts ownership of the LLC to their very person which is against the purpose of forming businesses.

Using a residential address invites unnecessary and possibly dangerous intrusion. Publicly providing such contact can subject you to harassment as well as unsafe secretive situations. A virtual office or business address lets you maintain your privacy without revealing public information by allowing your personal information to be outside the limit.

4. Failing to Create a Comprehensive Operating Agreement

Delaware does not require an operating agreement by law but it is often not wise to skip this step, especially in owners with more than one member’s LLC. The operating agreement of an LLC explains the proportion of ownership each member has, what responsibilities they undertake, how the management will be structured, and each member’s rights.

In the absence of such an agreement, the distribution of profits, who makes decisions, and drafters who do what in the Memorandum of Association will be contentious issues that can lead to court cases costing a lot of money. Even single-member LLCs benefit from operating agreements to certify that the LLC is independent of the owner for purposes of limited liability protection, which is very important.

5. Skipping Legal and Tax Advice

While the decision to establish Delaware LLC may be an easy one, it is nonetheless important to recognize that all businesses have legal and tax particularities in addition. It would be prudent to consult a specialist to determine if the Delaware LLC suits your needs because in case you are based in a high tax jurisdiction or have special requirements and are based offshore.

The absence of a tax advisor may lead to the incurrence of tax that could have been avoided due to, for instance, unclaimed deductions, missed credit opportunities, or inappropriate tax structuring. Also useful in helping you set up a good base is an attorney who will be of help in areas of compliance, intellectual property issues, and other relevant areas.

6. Misunderstanding the Need for Foreign Qualification

Another common mistake among the owners of Delaware LLCs is believing that just embedding the company in Delaware allows them the luxury to operate in any part of the US. But if your Delaware LLC has a workforce, has a place of business, or is significantly active within a different state, you will be required to file to register as a ‘foreign’ LLC in that state.

Non-filing of the foreign qualification application may lead to the imposition of penalties, as well as the accrual of back taxes and the prohibition on the right to execute contracts in that state. Figure out where you are going to do business and the expenses and conditions related to foreign registration are to be considered too.

7. Not Having the Federal Employer Identification Number (EIN)

Regardless of whether you refer to it as an EIN or a Federal Tax ID Number, such identification is needed when opening a business bank account, hiring employees, or even filing tax returns. Some single-member LLCs tend to believe there is no need for an EIN but this is very often the case, even for single-owner LLCs where it is needed to create a business credit profile and adhere to personal assets protection.

Preserving the income and expenses of the business using that number allows business owners to keep their finances separate which is very important in preserving the liability limitations accorded to the members of an LLC.

8. Overlooking Compliance Requirements

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When it comes to the yearly reporting of their LLCs, business owners consider Delaware to be low-maintenance since the state does not expect LLCs to file annual reports. This circumstance may cause some entrepreneurs to make the mistake of assuming that no continuous compliance is intended.

Apart from the levy of the franchise tax, there are other requirements which include keeping registered agent information for Delaware LLCs updated and any necessary filings that may be required. If your LLC is registered in Delaware but conducts business in other states, it may be required to meet compliance obligations and reporting in those states. Be proactive regarding both state and federal compliance requirements to maintain good standing.

9. Failing to Separate Business and Personal Finances

One key advantage of the LLC structure is that its limited liability protects personal assets against business debts. But when personal and business finances are combined, that protection can be undermined.

Such disregard is sometimes termed ‘piercing the corporate veil’ and leads to personal liability for defendants in lawsuits or debt collection actions made against the LLC. To avoid that, one is advised to create separate business bank accounts and use the accounts to make business-related transactions only. Furthermore, keep comprehensive records of business transactions and make sure that personal expenses are not charged to the business account.

10. Underestimating the Costs of Forming and Maintaining a Delaware LLC

Many business owners appreciate Delaware LLCs because they are simple and private but some costs should always be considered when forming or maintaining one, or even both. These include initial filing fees, franchise taxes that must be paid every year, foreign qualification fees (in cases where operations are not within Delaware), and the fee for the registered agent. Hence, these fees available could cumulatively be a lot of money in the long run.

Many business owners would argue that there is a good chance of wanting to go on to Delaware for the foreseen tax benefits. However, it is very possible that these benefits could be neutralized in the foreign qualification charges that your home state is bound to impose on you. Please ensure that you take time to work out such costs and see if indeed, going to a Delaware LLC is catered for in both your plans and your finances.

Easyfiling can help avoid mistakes

EasyFiling reduces errors that generally come during the process of LLC formation by walking individuals through the specific requisites of Delaware in a straightforward manner. It also automates the production of paperwork that has to be done in advance, readying all the relevant information that is required.

The platform can perform this function by looking for errors such as incorrect names or unlodgeable filings among common problems. The platform also can originate the provisions of state law. EasyFiling also provides registered agent facilities that help you not to forget this important detail and compliance alerts that help avoid the late submission of compliance requirements among others. As a result, the chances of failure to comply with the required legal obligations are very low.

Book a free consultation to form your LLC in Delaware with Easyfiling. Also, get a coupon code BEASY10 to get 10% off with incorporation.