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Greg O’Brien CPA, CTS
August 2, 2023

Benefits and Drawbacks of Setting up Your LLC in Delaware: Tax Strategist’s Insights

When it comes to setting up a Limited Liability Company (LLC), Delaware is a state that often comes to mind. With its reputation as a corporate-friendly jurisdiction, many businesses choose to incorporate in Delaware. In this article, we will explore the advantages of setting up your LLC in Delaware and how it can serve as a tax-free wealth strategy. By understanding the benefits and drawbacks, you can make an informed decision about whether Delaware is the right choice for your business.

Tax-Free Wealth: The Advantages of Setting Up Your LLC in Delaware

One of the primary reasons businesses choose to incorporate in Delaware is the state's favorable tax policies. Delaware does not impose income tax on corporations registered in the state that do not conduct business within its borders. This means that if your LLC operates solely outside of Delaware, you can potentially avoid paying state income tax.

Additionally, shareholders who do not reside in Delaware are not subject to tax on their shares in the state. This makes Delaware an attractive option for businesses with shareholders located outside of the state.

The Delaware Court of Chancery

Another advantage of incorporating in Delaware is the existence of the Court of Chancery. This specialized court handles corporate law cases, and its judges are experts in corporate matters. The decisions made by the Court of Chancery are known for being predictable and reliable, providing businesses with a level of certainty and clarity.

Quick and Efficient Filing Process

Delaware is committed to being corporation-friendly, and this is evident in its efficient filing process. The state processes filings quickly, often on the same day they are submitted. This allows businesses to start operating and conducting business without unnecessary delays.

Privacy Protection

When you file your LLC in Delaware, you are not required to disclose the names of your directors and officers to the state. This provides a level of privacy and anonymity for businesses and their stakeholders. If privacy is a concern for your business, Delaware offers a favorable environment.

No Residency Requirement

Delaware does not impose a residency requirement on officers, directors, or shareholders of LLCs. This means that individuals associated with the business do not need to be residents of Delaware. This provides flexibility for businesses that may have stakeholders located in different states or even internationally.

Slimmed-Down Corporate Structure

Delaware law allows for a streamlined corporate structure, which can be appealing to small businesses. In Delaware, a single person can hold the roles of officer, director, and shareholder. This simplifies the administrative requirements and reduces the burden for small businesses with limited resources.

Tax Optimization: Investor Preference for Delaware LLCs

Investors, such as angel investors and venture capitalists, often prefer to invest in companies that are incorporated in Delaware. This is due to Delaware's well-established corporate laws and the expertise of its Court of Chancery. By incorporating in Delaware, you may enhance your chances of attracting investment and growing your business.

Drawbacks of Incorporating in Delaware

While there are significant advantages to incorporating in Delaware, it is important to consider the potential drawbacks as well.

Tax Considerations for Small Businesses

While Delaware offers tax benefits for corporations, these advantages may not extend to small businesses. If your business operates within your home state, you may still be subject to state income taxes there. It is essential to consult with a tax strategist like Anomaly CPA to understand how incorporating in Delaware may impact your overall tax obligations.

Higher Filing Fees

Delaware's filing fees for LLCs are generally higher than those of other states. This can result in increased costs, especially for small businesses with limited budgets. It is important to factor in these fees when considering the financial implications of incorporating in Delaware.

Delaware Franchise Tax

Although Delaware does not impose income tax on corporations that do not do business within the state, LLCs are still required to pay the Delaware franchise tax. The amount of this tax is based on the value of the shares. While it may be minimal for small businesses, it can increase as the number of shares and their value grow. Additionally, you may still be required to pay franchise tax in your home state, adding to your overall tax obligations.

Additional State Compliance Requirements

Incorporating in Delaware does not exempt you from meeting the filing and licensing requirements of your home state. You will still need to comply with your state's regulations, file annual reports, and fulfill any other obligations necessary to conduct business in your home state. This can result in additional administrative work and expenses.

CPA Near Me: Need for a Delaware Registered Agent

When incorporating in Delaware, you are required to have a registered agent within the state. This agent serves as a point of contact and receives legal filings on behalf of your business. Hiring a registered agent can be an additional cost to consider when weighing the benefits and drawbacks of incorporating in Delaware.

Legal Disputes in Delaware

If your business is incorporated in Delaware, any legal disputes involving your company must be heard in Delaware's Court of Chancery. This means that you may need to travel to Delaware and hire a Delaware attorney to handle these disputes. The additional travel and legal expenses should be taken into account when considering the implications of incorporating in Delaware.


Incorporating your LLC in Delaware can be a tax-efficient wealth strategy for many businesses. The state offers numerous benefits, including tax advantages, a specialized court system, quick filing processes, privacy protection, and flexibility in corporate structure. However, it is important to carefully consider the potential drawbacks, such as tax considerations for small businesses, higher filing fees, franchise tax obligations, additional state compliance requirements, the need for a registered agent, and potential legal disputes in Delaware.

To determine if incorporating in Delaware is the right choice for your business, it is advisable to consult with a tax strategist or CPA who can assess your specific circumstances and provide personalized guidance. By weighing the pros and cons and seeking professional advice, you can make an informed decision that aligns with your business goals and financial objectives. If you want to learn more about this, you can connect with us here

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