Delaware in April 2016: what the formation actually costs
A filing fee of $90, an annual tax of $300, and one court that keeps the rest of the country watching
Contents 5 sections
Delaware LLC costs $90 to form and $300 a year to keep. Those are the two numbers that matter. Everything else — the Court of Chancery, the 1.4 million entities on the rolls, the registered-agent price war, the franchise-tax notices that panic first-time founders every March — is texture around those two numbers.
This is a guide for someone forming in April 2016, written to survive one reading rather than thirty. It will not explain why Delaware exists, because you already know; you would not be here otherwise.
The mechanics
You file a Certificate of Formation with the Division of Corporations. It is six lines long: the name of the LLC, its registered-office address (which must be in Delaware), the name and address of its registered agent (who must be in Delaware), and a signature. The Division has a PDF you can fill in in ten minutes. You can file it by mail, by fax, or through a registered agent who has a filing account with the state.
The standard fee is $90. If you want expedited processing, Delaware sells a menu: $50 for 24-hour turnaround, $100 for same-day, $200 for two-hour, $500 for one-hour, $1,000 for a half-hour. The two-hour tier is the one most transactional lawyers use when a deal is closing and someone discovers the holding entity does not yet exist.
You will then need an EIN, which the IRS gives you in the time it takes to fill out Form SS-4 online. You will need an operating agreement, which Delaware does not require you to file but expects you to have. And you will need to decide, for federal tax purposes, whether you want your LLC treated as a disregarded entity (single-member default), a partnership (multi-member default), an S-corp, or a C-corp. Most founders let the default ride for the first year and revisit when there is revenue.
Maintenance is where people get it wrong
Delaware does not require an annual report from LLCs. It requires an annual tax. The tax is a flat $300, due June 1 every year, on every LLC registered in the state regardless of whether the LLC did anything. There is no proration for a June formation. There is no partial credit for dissolution mid-year until you formally cancel. Miss the June 1 deadline and you pay a $200 penalty plus 1.5% monthly interest.
The notice Delaware sends is a single-page form that looks like junk mail and is routinely thrown away. This is responsible for a large share of the small-balance collections the state sends out in late fall.
Corporations, by contrast, owe both a $50 annual-report filing fee and a franchise tax. The franchise tax can be computed two ways — authorized shares or assumed par value — and the default printed on the notice is always the larger of the two. Founders of newly minted C-corps with 10 million authorized shares routinely receive six-figure franchise-tax bills in February, panic, and call their attorneys. The assumed-par-value method usually brings the bill down to the $400 minimum. If you are a C-corp, you want to know this before the notice arrives.
The registered-agent market
Every Delaware LLC needs a registered agent with a physical Delaware address. Prices range from roughly $50 a year at the commodity end to several hundred at the full-service end. At the low end you are paying for a mailbox; at the high end you are paying for a company that will catch service of process, forward it the same day, remind you about the June tax, and fix your filing if you get the name wrong.
If this is your first Delaware entity, pay more than the commodity rate. The difference between a $50 agent and a $150 agent is usually one missed annual tax, one bounced registered-mail piece, or one service of process left in a stack for two weeks.
The Court of Chancery, honestly
The Court of Chancery is why sophisticated parties pick Delaware and also why most of that sophistication is wasted on a sole-member LLC managing a side project. Chancery decides equity cases — merger disputes, fiduciary suits, appraisal actions — without juries, quickly, and with a written opinion the rest of the country treats as persuasive. For a venture-backed company headed toward an exit, that is load-bearing. For a two-person LLC running a consulting practice, it is fine to like but not a reason by itself.
If you are forming because your lawyer told you to, your lawyer is usually right. If you are forming because you read Delaware was the default, ask whether anything about your business actually needs the Chancery option. In most cases the answer is no, and Wyoming or your home state will serve.
Who this state actually makes sense for
Three kinds of entities belong in Delaware in 2016.
The first is anything you expect to raise money into. Institutional investors will ask for Delaware, and if they don't, their law firm will. Starting here saves a conversion later, which costs several thousand dollars in legal and tax advice and leaves a scar in the cap table.
The second is a holding company whose subsidiaries may sue or be sued by each other. The case law is worth the extra maintenance.
The third is a C-corp that anticipates a sale. If you are going to end up in Delaware anyway, start there.
Everything else — the one-person consultancies, the rental-property LLCs, the family-business reorganizations — can form in a lower-cost state and be better off. The Delaware premium is small in dollars and large in mindshare, and the mindshare is worth spending somewhere else.
If you are forming this quarter and the business is a holding vehicle, file Delaware this week and do not overthink the registered agent; pick a known commercial provider and move on. If the business is operational and local, form at home and revisit the Delaware question when you next have a reason to.