Delaware LLCs are popular with small business owners because they are easy to set up, understand and manage. However, there are some common Delaware LLC mistakes owners make. The results of these mistakes can range from just an inconvenience to something that hurts the business.
Forming a Delaware LLC is a smart move for your business, however, you need to know how to operate an LLC the right way. Here are some of the biggest mistakes that Delaware LLC owners make, and how to avoid them.
Delaware LLC Mistake #1: Not Completing and Signing the Operating Agreement.
A Delaware LLC should have a written LLC Operating Agreement signed by all of the LLC Members. Some Delaware LLC owners may forget to complete and sign their LLC Operating Agreement.
The LLC Operating Agreement is an important document that establishes the organization and management of an LLC. An LLC Operating Agreement typically describes:
- Who the LLC owners (called, “Members”) are;
- What each Member’s ownership percentage is;
- Who has voting rights in the LLC; and,
- How decisions are made in the LLC.
When you use an incorporation service, like IncNow, to form your Delaware LLC, they may provide you with an LLC Operating Agreement to use. For example, IncNow’s Ready-to-Sign LLC Operating Agreement is prepared by A-rated Delaware business lawyers and comes included with every Now LLC package.
Your LLC Operating Agreement may be missing important information that you need to fill in, like the names of the LLC Managers or Officers. Also, the LLC Members have not signed the Operating Agreement.
LLC owners also may not read their Operating Agreement before signing it. You should take the time to read the LLC Operating Agreement and make sure it has all of the rules and provisions that your company needs. If you want to change the LLC Operating Agreement after signing it, you’ll need to write an entirely new agreement.
Having a completed and signed LLC Operating Agreement is the best way to protect a business and avoid disputes with business partners.
Delaware LLC Mistake #2: Not Paying Delaware Annual Franchise Tax.
A Delaware LLC needs to pay the Delaware Annual Franchise Tax every year that the company is active. For LLCs, the Delaware Annual Franchise Tax is a $300 flat fee due by June 1st each year. LLC Owners submit their Delaware Annual Franchise Tax payment to the Delaware Secretary of State’s office.
Think of the Delaware Annual Franchise Tax as a maintenance fee. You need to pay your Franchise Tax each year to keep your Delaware LLC in “good standing” and maintain your right to do business.
A Delaware LLC loses its good standing status with the state if the company falls behind on paying its Franchise Tax. If a Delaware LLC goes three years without paying its Franchise Tax, the Delaware Secretary of State’s office will void the company. This means the LLC will no longer be able to do business.
Reviving a Delaware LLC voided by the state is a costly process that includes:
- Paying all the Delaware Annual Franchise Tax owed;
- Paying all late penalties and interest; and,
- Paying a filing fee for a Certificate of Revival.
Delaware LLC Mistake #3: Not Paying Registered Agent Fees.
Some LLC owners forget to pay their annual service fee to their Delaware registered agent. If you do not pay your annual registered agent fee, your agent might resign.
If your registered agent resigns, your Delaware LLC will need to appoint a new agent within 30 days. The Delaware Secretary of State’s office will void a Delaware LLC if the company goes more than 30 days without an active registered agent.
A Delaware LLC needs to have a Delaware registered agent appointed at all times. If you do not have an address in Delaware, you will need to hire a company to serve as your Delaware registered agent.
Delaware LLC Mistake #4: Using a Trade Name… Without a DBA.
A Delaware LLC can do business under a different name other than its legal name. However, to do this legally, the company needs to get a DBA.
DBA stands for “Doing Business As” and is also called a “trade name”. A DBA is a type of public filing that allows a company, like a Delaware LLC or corporation, to use a different name other than its legal name for business purposes. For example, Chevy’s Tacos LLC can do business as just “Chevy’s Tacos”. However, the company will need to file a DBA for Chevy’s Tacos first.
IncNow can help a company file a DBA in New Castle County, Delaware.
A Delaware LLC can use its trade name for business, however, the company should still use its full legal name when signing contracts. A signature block for a contract should start with the LLC name followed by a signature line for the Authorized Person, like the Managing Member, Manager or company Officer.
Delaware LLC Mistake #5: Creating LLC Stock Certificates.
Delaware LLC owners should avoid using any kind of stock or Membership certificates as proof of ownership in their LLC. This can cause confusion and lead to disputes between business partners.
Corporations issue stock certificates to their owners. Corporations use stock certificates as proof of ownership, but an LLC details ownership in the company’s LLC Operating Agreement.
The LLC Operating Agreement for a Delaware LLC should clearly describe the ownership structure, voting rights, and responsibilities of each person involved in the company. All the Members who have ownership in the LLC should sign a written copy of the Operating Agreement. The signed copy should be kept along with the company’s other important documents.
Delaware LLC Mistake #6: Using a Registered Agent Address as a Business Address.
Your LLC’s registered agent address is just that… the registered agent address. Your Delaware registered agent address should never be used as a business address or the principal place of business for your Delaware LLC.
A Delaware registered agent is required to do two things:
- Accept important legal documents, called “Service of Process”, for a company and forward them to the owners; and,
- Forward certain state tax notices.
A business owner risks having their mail returned to the sender if they use their registered agent’s address as the business address for their Delaware LLC. Even worse, your Delaware registered agent may resign if you use their address as a business address. This would lead to the Delaware LLC eventually becoming void.
Delaware LLC Mistake #7: Not Foreign Qualifying in Other States.
A Delaware LLC is able to do business in any U.S. state. However, if you plan on doing business with your Delaware LLC outside of Delaware, you will need to file a foreign qualification first. If a Delaware LLC does business in another state without completing a foreign qualification, the company can be hit with serious fines and penalties.
“Foreign qualification” is the legal process of registering a company, like an LLC or corporation, to do business in a state other than its home state. Any business entity operating outside of its legally formed state is a “foreign company”.
Every U.S. state has different laws and regulations. So, a Delaware LLC needs to complete a foreign qualification in order to have the legal right to do business in a different state.
IncNow can help qualify an LLC to do business in any U.S. state.
Delaware LLC Mistake #8: Not Updating Contact Information with Your Registered Agent
Delaware LLC owners may forget to tell their Delaware registered when their contact information changes. This can result in them not receiving important legal documents for the company, like a lawsuit, that the registered agent needs to forward on to them.
Your Delaware registered agent needs to have an appropriate contact for your Delaware LLC so they can forward important legal documents or notices served to your company.
A Delaware registered agent for an LLC needs to keep a communications contact for the company in their records. This includes a:
- Email; and,
- Phone number.
Delaware LLC Mistake #9: Trying to File the Operating Agreement
Sometimes, Delaware LLC owners try to file their LLC Operating Agreement with the Secretary of State or send the signed copy back to their registered agent. The Delaware Secretary of State’s office does not need a copy of the LLC Operating Agreement. The Certificate of Formation is the only document that a Delaware LLC needs to file publicly.
An LLC Operating Agreement is like a contract between an LLC and its Members. It details what each Member’s ownership percentage is and how the company should be run.
The LLC Operating Agreement is a private company document that doesn’t require filing with the Secretary of State’s office. A signed copy of the LLC Operating Agreement can be kept with the company’s internal records.