When you set up a new Limited Liability Company (LLC), one of the first decisions is whether to open an LLC in your home state where you’ll run your business or form an LLC in a different jurisdiction.

New entrepreneurs must understand the difference between domestic and foreign LLC classifications and how it impacts their business structure.

Let’s start with an example to highlight the basics.

John Smith is a carpenter and a resident of Miami, Florida. John wants to start a custom carpentry business to install custom closets in new and existing homes. John anticipates his market will be the southeast area of Florida. John is exploring the available entity options for launching his new business.

Florida Domestic LLC: John’s first option is to open a Florida LLC, where he will file Articles of Organization with the Florida Division of Corporations, and the state will open him a domestic LLC. The entity is a Florida domestic LLC because the LLC was initially formed and registered in Florida. The LLC did not already exist in a non-Florida jurisdiction.

Delaware Domestic LLC with Foreign Florida Registration: Alternatively, John is considering opening an LLC in Delaware. John read that Delaware is a popular jurisdiction because of its business-friendly laws, low state taxes, privacy protections, and enhanced liability protections for the LLC and its members. If John files the Certificate of Formation in Delaware, the LLC will be a domestic LLC with respect to Delaware because the LLC was initially formed and registered in Delaware.

John’s attorney advises him that although he has a Delaware LLC, he must still register the LLC in Florida because he conducts business within the state. John files a “qualification of foreign LLC” in Florida to register his entity with the state. The LLC is a domestic LLC with respect to Delaware and is a foreign LLC with respect to Florida. Each year, when John goes to renew his LLC, he files an annual report with Delaware and pays the annual franchise tax of $300. John must also renew the Florida foreign registration and pay the applicable fees.

Benefits and Drawbacks of Delaware LLC with Foreign Registration

Many new entrepreneurs wonder why they should bother with registering an LLC in a state outside of where they will conduct their business.

Advantages of the Delaware LLC

  • Legal Protections. Delaware generally has better liability protections for its LLCs versus other states. In the United States, when you form an LLC, the laws of the jurisdiction in which the LLC was formed will govern the formation, organization, internal affairs, and liability protections for its members and representatives, regardless of where the LLC later obtains a foreign qualification. In other words, the Delaware Limited Liability Company Act and other related Delaware statutes will apply even if the entity registers as a foreign LLC in a different state. This benefit provides the LLC and its owners more assurance if they operate in a state with less robust liability protections.  
  • Enhanced Privacy. Delaware does not collect information on the LLC members or its managers. A Delaware Certificate of Formation does not list its members’ names, addresses, or ownership percentages. In addition, when a Delaware LLC files its annual report, it is not required to divulge any information on its owners. For these reasons, Delaware does not maintain a private database or searchable public database where persons can find information on the LLC ownership. In contrast, many other states require information on LLC owners and managers and make this information publicly available on their Secretary of State websites.
  • Credibility. The Delaware LLC is one of the most reputable entity types for U.S. and non-U.S. businesses. If you have plans to sell the company or attract new investors, using a Delaware LLC will boost your company’s credibility.

Disadvantages of the Delaware LLC with Foreign Registration

  • Adminstrative Filings. Using this arrangement, an LLC is registered in at least two jurisdictions and has doubled its annual administrative filings and other tasks. Many businesses may find these additional filing obligations excessive and would rather avoid the additional filings.
  • Annual Costs. By forming a Delaware LLC and registering in a second state, the LLC increases its yearly filing fees. The Delaware LLC annual fees are $300 per year, plus the LLC must maintain a registered agent in Delaware, which usually costs $50 per year. In addition, the LLC must pay annual filing fees and registered agent fees in the second state where it filed its foreign qualification. Due to the increased annual costs, many businesses opt to simply form an LLC within their home state where they conduct business.

Final Thoughts

Delaware’s favorable business environment makes it an attractive state to form an LLC or corporation. While having a domestic LLC formed in your home state offers simplicity and flexibility, creating a Delaware LLC first and registering as a foreign LLC can provide substantial benefits.

As always, we recommend you consult with a business attorney to ensure you make the most informed decision.