Should I Form My LLC in Delaware? Why This Popular Advice Could Cost Your Small Business Thousands
- Jordan D. Howlette
- Sep 7
- 7 min read
The Origins of the Delaware Recommendation
The recommendation to form businesses in Delaware has deep historical roots that date back to the early 20th century. Delaware deliberately crafted its corporate laws to attract business formations, beginning with the General Corporation Law of 1899. The state established the Court of Chancery, a specialized business court that operates without juries and focuses exclusively on business disputes, creating a sophisticated body of corporate case law that provides predictability for complex business matters.
This strategy proved remarkably successful for attracting large corporations. Delaware offered flexible corporate statutes, business-friendly laws, and judges with deep expertise in corporate matters. The state also provided advantages such as no requirement for public disclosure of stockholder names, flexibility in corporate structure, and the ability to have a single person serve as all required officers. By maintaining low franchise taxes for small entities while generating revenue from large corporations, Delaware created an ecosystem that became the gold standard for corporate formation.
Today, more than sixty percent of Fortune 500 companies are incorporated in Delaware, which has cemented its reputation as the premier jurisdiction for business formation. This success with large corporations has created a widespread assumption that all businesses should form in Delaware, regardless of size, scope, or operational footprint.
When Delaware Formation Makes Strategic Sense
Delaware formation can offer genuine advantages for certain types of businesses, though these scenarios are relatively limited for small business owners. Companies planning to seek venture capital or private equity investment often benefit from Delaware formation because institutional investors strongly prefer Delaware entities. The sophisticated investor community has developed standardized practices around Delaware law, and investors appreciate the predictability and extensive case law that Delaware provides. This preference is so strong that companies not formed in Delaware often must reincorporate there before receiving institutional funding.
Businesses with complex ownership structures involving multiple classes of stock, intricate voting arrangements, or sophisticated governance provisions may find Delaware's flexible corporate statutes advantageous. Delaware law permits creative structuring that might be more restricted in other states, allowing for customized arrangements between owners, managers, and investors.
Companies operating in multiple states with no single primary location might consider Delaware as a neutral jurisdiction. For businesses that genuinely operate across numerous states with relatively equal presence in each, Delaware can serve as a neutral home state that doesn't favor any particular operational location. Additionally, businesses involved in complex commercial transactions, intellectual property licensing, or those anticipating sophisticated business disputes may value access to Delaware's Court of Chancery and its deep bench of business law expertise.
The Reality for Single-Member LLCs and Small Businesses
For the vast majority of small businesses, particularly single-member LLCs operating in a single state, forming in Delaware creates unnecessary complexity and expense without providing meaningful benefits. The most significant issue is the requirement for foreign qualification. When a Delaware LLC conducts business in another state, such as Florida, it must register as a foreign entity in that state. This means filing additional paperwork, paying registration fees, and maintaining good standing in both Delaware and the state where the business actually operates.
This dual registration requirement effectively doubles many of the administrative burdens of running a business. The business must pay franchise taxes or annual fees in both Delaware and its home state. Delaware charges an annual franchise tax of $300 for LLCs, and the operating state will have its own fees for foreign entity registration and annual reports. The business must maintain a registered agent in both states, adding another layer of ongoing expense. Registered agents typically charge annual fees ranging from $50 to $300 or more per state.
The compliance burden extends beyond mere fees. The business must file annual reports in both jurisdictions, maintain good standing in both states, and ensure compliance with both states' requirements for LLC operations. Any changes to the business, such as amendments to the operating agreement or changes in management structure, may require filings in both states. If the business fails to maintain compliance in either state, it risks losing its good standing, which can affect its ability to enforce contracts, access courts, or maintain liability protection.
Tax Implications and Misconceptions
One of the most persistent myths about Delaware formation is that it provides tax advantages for small businesses. This misconception likely stems from Delaware's lack of sales tax and its favorable tax treatment for certain holding companies and passive investment entities. However, for active businesses, these advantages largely disappear.
The reality of state taxation follows a principle called nexus, which means businesses are taxed where they conduct business activities, not necessarily where they are formed. A Delaware LLC operating entirely in Florida will pay Florida taxes on its Florida income, regardless of its Delaware formation. The Delaware formation provides no shield from Florida taxation and may actually create additional tax compliance obligations.
For single-member LLCs, which are typically disregarded entities for tax purposes, the tax situation is particularly straightforward. The income flows through to the owner's personal tax return and is taxed in the owner's state of residence. The Delaware formation adds no tax benefit and may complicate tax filings if Delaware requires any specific reporting for LLCs with no Delaware-source income.
Legal Protections and Practical Considerations
Many small business owners believe that Delaware formation provides superior liability protection or asset protection benefits. While Delaware does have well-developed LLC law, the practical reality is that most states have adopted modern LLC statutes that provide robust liability protection for members. The Limited Liability Company Act has been widely adopted across states, creating substantial uniformity in basic LLC protections.
For liability protection purposes, what matters more than the state of formation is proper business operation. This includes maintaining separation between personal and business assets, following corporate formalities to the extent required, adequately capitalizing the business, and maintaining proper insurance coverage. A properly operated Florida LLC will provide the same fundamental liability protection as a Delaware LLC operating in Florida.
Furthermore, when disputes arise, they are often resolved in the state where the business operates or where the dispute occurred, not in Delaware. A Delaware LLC operating in Florida will likely find itself in Florida courts for most business disputes, employment matters, customer issues, and contractual disagreements. The Delaware formation provides little practical advantage in these common scenarios.
Making the Right Choice for Your Business
For entrepreneurs forming single-member LLCs or small businesses that will operate primarily in one state, the recommendation is clear and straightforward: form your LLC in the state where you will conduct business. This approach minimizes complexity, reduces costs, simplifies compliance, and provides all the legal protections you need for successful business operations.
Forming in your home state eliminates the need for foreign qualification, reduces the number of annual filings and fees, simplifies tax compliance, and ensures that your business laws align with your operational reality. You will have one registered agent, one set of annual reports, one franchise tax or fee payment, and one set of state laws to understand and follow.
The Delaware formation myth persists because it contains a kernel of truth for certain businesses, particularly those seeking institutional investment or operating complex multi-state enterprises. However, for the typical small business owner, entrepreneur, or single-member LLC, Delaware formation creates unnecessary complications without corresponding benefits. The money saved by avoiding dual-state compliance can be better invested in growing your business, improving your products or services, or securing appropriate insurance coverage.
Consider Delaware formation only if you have specific, articulable reasons that align with Delaware's genuine advantages, such as imminent venture capital investment, complex multi-member ownership structures requiring Delaware's flexibility, or multi-state operations with no clear home state. For everyone else, forming in your home state remains the most practical, cost-effective, and legally sound approach to business formation.
Conclusion
The prevalent recommendation to form all businesses in Delaware represents outdated thinking that fails to account for the realities facing small business owners today. While Delaware has earned its reputation as a premier jurisdiction for large corporations and complex business entities, this reputation should not be blindly applied to every business formation decision. Smart business formation means choosing the jurisdiction that best serves your specific business needs, and for most small businesses, that jurisdiction is the state where you live and work. By forming your LLC in your home state, you can avoid unnecessary complexity, reduce ongoing costs, and focus your energy on what truly matters: building and growing your successful business.
About the Author
Attorney Jordan D. Howlette is the founder and Managing Attorney of Justly Prudent, a civil litigation law firm committed to confronting systemic injustice and holding wrongdoers accountable. Since transitioning from a successful tenure as a trial attorney in the U.S. Department of Justice, Jordan has dedicated his practice to representing individuals and businesses whose civil rights and individual liberties have been violated by public officials and institutions.
Under Jordan’s leadership, Justly Prudent has brought forward high-impact civil rights cases against local governments and agencies for egregious misconduct, including unlawful property seizures, racially discriminatory harassment, and abuses of regulatory power. His litigation strategy blends sharp legal analysis with an unrelenting commitment to equity, ensuring that every client—regardless of their background or resources—has a powerful advocate in their corner.
Jordan’s work has earned recognition for its courage and creativity in advancing justice through the courts. A veteran of the U.S. Army and a cum laude graduate of New England Law | Boston, he brings principled discipline and strategic focus to every case he handles. As Managing Attorney, Jordan continues to build Justly Prudent into a leading voice for civil rights and government accountability across the country.
DISCLAIMER: The information in this article is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Justly Prudent or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included in, or accessible through, this article without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.