Over the last several years, I have needed to start several Delaware Limited Liability Companies (LLC), maintain them by paying the annual franchise tax, and, sadly, dissolve some of these entities. Each time I have to do these things, I wind up doing my homework all over again to figure them out. This time I though it might make sense to consolidate this information and share it with others.
I should first note that my objective here is to simply provide an explanation as to how *I* have done it before. It goes without saying that you should consult a qualified attorney for any questions, or if you need more guidance.
With that out of the way, the first thing to understand is what is an LLC? If you google that question specifically, you will have plenty of information at your disposal. Here is the Wikipedia page. For our purposes now, it is probably enough to say that an LLC is a relatively new kind of business entity that is something of a hybrid between a more traditional S Corporation, and a Partnership, or Sole Proprietorship. In other words, as an LLC, you will have ‘limited liability‘ in terms of the financial/legal obligations of the company, but still have pass-through profits, losses, and income tax. This means that any profits that an LLC makes, pass through the LLC and into the hands of the LLC “members” – usually in proportion to that member’s holding in the LLC. The same goes for declaring losses. Also, you will report LLC profits on your personal income tax (though the LLC still must file its own tax forms annually). This arrangement can often provide more flexibility to a small business than an S corporation.
Although most, if not every, state allows LLC entities to form, Delaware and Nevada are the most popular due to their low/non-existent taxes on corporations
Step 1: Forming an LLC
Approximate Cost: <$500
Technically speaking, you can form an LLC in Delaware by filling out this PDF form, and paying Delaware $90. However, there is more to forming an LLC than just the document. The state of Delaware requires that every business entity in DE use a Registered Agent. These are simply your official business representatives in the state. Again, a quick google search will bring back a lot of hits. So, for purposes of starting an LLC out on the right foot, I would suggest finding a registered agent, and let them do the formation. You will get more than just the paperwork filled out, and it feels good to actually have someone who knows what they are doing do the work!
I have used Harvard Business Services twice, and I found them reasonably priced and also very informative. They have 3 tiers of service, and I chose the middle tier for $429. Among other things, this included the price of formation, filing for a federal EIN number (your company’s social security number), a ‘starter’ Operating Agreement, and Articles of Organization, the first 12 months of Registered Agent fees and a nice, metal, corporate seal that leaves an embossed imprint on official papers. Very nice! Basically, everything you needed to get started on the right foot. As far as I’m concerned, the price was well worth it, but I’m sure there are other opinions.
Step 2: Maintainence
Approximate Cost: $250 + Registered Agent Fee
There is not a whole lot of ‘official’ maintainance that needs to be done – excepting taxes, and record keeping, of course. But I’m talking about bureaucratic aspects here. However, there are two annual fees to be aware of: the annual Franchise tax, and an annual Registered Agent fee.
The annual Franchise tax must be payed every year, regardless of whether or not you made any money, or even if you never did anything with the LLC whatsoever. As a tax, it is immutable. As of now, January 2010, the annual franchise tax is $250 if paid before June 1, and $350 if paid after June 1.
The Registered Agent fee depends on which company you go with. HBS is $50/year, or $75 if you pay late.
Most of the time, the Registered Agents like to take care of the Franchise tax for you because they can tack on some extra fees. However, it is so easy to pay yourself that you might as well save the cash. Here is the link:
All you need is your Delaware File number, which will be on the papers you received from your Registered Agent. You can pay by credit card.
You can probably pay your Registered Agent fee online, also, but you will have to check with them.
Step 3: Dissolution….
If it comes to it, you may need to dissolve your company. If so, don’t delay or bury your head in the sand when the Franchise tax is due, and your Registered Agent keeps hounding you (not that I would ever do that!). Remember, you cannot even dissolve the company until these taxes are paid.
So, you’re all paid up on taxes. Now what? Once again, your Registered Agent will offer to do the dissolution for you, but I have found this to be quite expensive. It is much cheaper, and not at all difficult, to do this yourself. You will need to fill out two forms: the Certificate of Cancellation, and the Corporate Certificate Cover Memo. The cost of dissolution is $200. You can input your credit card info into the Cover Memo, or send a check. If you need help with any of these, just give the friendly folks at the Delaware incorporation office a call at: 302-739-3073. They were very helpful when I called. When the forms are filled in fax them to: 302-739-3812.
All in all, starting, maintaining, and dissolving a Delaware LLC is well within the realm of DIY, though I would strongly suggest using a Registered Agent for the initial formation.
Official State of Delaware site for corporations
LLC corporate forms
other business entity forms
I hope this has been helpful. If nothing else, at least I have it all written down for next time!
Good luck with your incorporation endeavors, and please feel free to correct me on anything in the comments, and I will edit this posting to reflect those changes.