Delaware vs New York LLC: Which State is Better to Start Business?

As experience has shown, the majority of small businesses are financially fragile. In recent years, many companies and startups have been significantly affected by the current crisis, or even worse, have failed, facing the pandemic and other business stressors. In this respect, starting a new business, it is crucial to understand how to protect oneself against various risks.

An LLC is a perfect business structure for a startup because it is as fast, easy, and adaptable as you can imagine. It becomes the best choice for a new business as an LLC is much more flexible than a corporation, and you are not personally liable for the debts in contrast to any sole proprietorship. This business structure is responsible for its own debts and obligations, but any limited liability company makes it impossible to use your personal assets to collect on business financial obligations.

When it comes to taxes, an LLC gets the best of all worlds as it avoids double taxation and allows businesses to choose how they will be taxed. Besides, all business profits are taxed irrespective of income. Multiple LLC peculiarities you benefit from leave you room to think about forming this type of company right away. The fast and seamless formation process makes LLCs all the more attractive for your successful business start.

Delaware vs New York LLC Formation: How They Converge

Even though Delaware is not formally part of the top ten states for small businesses, it is often regarded as one of the best locations for LLCs as it provides limited fees and tax obligations. Although preferred by large corporations, this tiny state supports a comparatively low-maintenance LLC formation as distinct from many other states and has become home to more than 50 percent of the country’s fortune companies. 

Delaware is also notable for its firm statutes and business codes, which is confirmed by the so-called Court of Chancery, a court established explicitly for businesses to resolve cases in front of the judge quickly as compared to other states. So, please, respect all your obligations not to be brought to court before you can say knife.

By the way, regarding rapidity, New York is the one to provide the fastest and easiest path to create an LLC for startups, small- and medium-sized ventures, recognizing corporations, sole proprietorships, and other less familiar business forms.

Being one of the most popular business structures in the state, New York LLCs can represent either one-person or multi-member structures. The State of New York provides simple and straightforward formation and maintenance requirements, and legalities are also not so hard to figure out.

Nevertheless, to make the right pick, it is essential to draw a detailed comparison revealing correspondences and divergences, pros and cons of Delaware vs New York LLC formation. Let’s get down to business then, shall we?

New York LLC vs Delaware LLC: Correspondences

In terms of essential legal regulations and requirements that the LLC formation process should meet, there are many similarities between Delaware and the State of New York:

• Reliable asset protection. According to the law, in both states, your personal assets are well protected from judgments. Opening a corporate bank account is recommended to differentiate between business and personal finances. Both New York and Delaware LLC owners may risk only those assets put into business;
• Pass-through taxation. Companies are not subject to paying federal or state income tax in both states. All profits going through the Delaware and New York LLCs will get into the members’ accounts and then be taxed according to their personal tax rate. So, you’ll never face double taxation as your business is not taxed directly, and your profits are only taxed once;
• Adaptive management. The two states allow LLC members to manage the company unless the management authority is transferred to a manager whose activity is regulated by the terms of the operating agreement.

New York LLC vs Delaware LLC: Divergences

Suppose you’re thinking about the state for starting a limited liability company. In that case, it is essential to draw a detailed comparison to determine the considerable differences between New York and Delaware requirements. Let’s dwell on the most significant ones right away:

• List of documents. Business owners are required to file the so-called Articles of Organization in New York with the Secretary of State’s office and publish their LLC information with at least two newspapers (which may cost far more than $1000 sometimes), thus submitting the certificate of publication. Starting their Delaware LLCs, owners must file their Certificate of Formation, finalizing the paperwork exactly where it has begun;
• Operating agreement. All New York LLCs must have a written operating agreement, while the state of Delaware does not require one. Still, it is preferable for every Delaware company to have a written operating agreement;
• State fees. In contrast to The Empire State, where you must pay a $200 fee for filing the Articles of Organization, your costs will not exceed $90 for filing the Certificate of Formation in Delaware. Still, before 1 June, Delaware LLCs are subject to pay a $300 annual fee. Mind that failure to pay in time will result in a $200 penalty;
• Business filings. Unlike New York LLCs, which are required to file annual reports while staying on top of the filing deadlines, limited liability companies in Delaware are not obliged to file an annual report. Moreover, every two years, New York ventures must complete a biennial statement to update their business information;
• Domestication procedures. Whereas Delaware allows domestication when both foreign and Delaware jurisdictions approve it, the State of New York has no provisions for LLC domestication. In this respect, there’s no room for more than two options: either to qualify your existing business as a New York foreign company or to dissolve it in its original state and form an LLC in New York.

Creating an LLC Delaware vs New York: Pros and Cons to Examine

As long as you have already figured out general correspondences and divergences between LLC Delaware vs New York in terms of its formation and maintenance, the time has come to go deeper into the subject, highlighting each state's individual characteristics.

Delaware LLC Pros and Cons

Despite being one of the smallest states in the USA, Delaware has created a wide range of opportunities for companies since 1996. Many businesses choose this state to form an limited liability company to take advantage of the laws. The table below represents a brief outline of the main advantages and disadvantages you may experience should you decide to start your LLC in Delaware.

Delaware LLC Advantages

• Fast filing. It is impressive how Delaware has managed to reduce filing time down to under an hour, allowing your LLC to go on with other business matters as fast as possible;
• Series LLCs. The First State supports an LLC with other LLCs built into it. Still, this formation is regarded as a single identity, thus paying only one annual franchise tax;
• Business-friendly regulations. The laws of Delaware are considered the most conducive to business in the USA, allowing you to choose among multiple business options as to taxation, investment, and management;
• The Court of Chancery. It has particular jurisdiction to hear business matters using the judges well-known for their expertise and specializing in corporate law, thus providing quick decision-making;
• Tax benefits. If you don’t conduct business within Delaware, you pay neither income nor sales tax. The same applies to tax on income from intellectual property (tax royalty payments);
• Name privacy. If you are looking for additional confidentiality, you’ve come to the right place, as disclosing your identity on formation documents in Delaware is not obligatory.

Delaware LLC Disadvantages

• Annual tax. The law calls Delaware LLCs to pay a $300 annual fee, which may cost you an arm and a leg as compared to The Empire State, for example, where the fee amount is calculated depending on LLC gross income and starts from $25;
• Dual registration. Regretfully, yes. Should you not operate or live in Delaware, you must register your home state to maintain a dual registration. Basically, it means you have to do everything twice: annual reports, filing fees, and tax return filings are mandatory in both states;
• Legal issues. Having a series LLC instead of a classic one in Delaware, you may face significant judicial difficulties as the structure has not been yet legally tested outside of the state.

New York LLC Pros and Cons

The Empire State is famous worldwide due to its relentless business pulse. According to the research, if the State of New York were a separate community, it would be among the fifteen largest economies on the globe. So, it’s high time to dwell at a greater length on the advantages and disadvantages of starting a New York limited liability company but first, let’s look at the table below.

New York LLC Advantages

• Environment. The prestige of incorporating in New York vs Delaware could hardly be overestimated. Many state companies represent industry forerunners and significantly influence worldwide commercial, financial, and cultural life. Starting your LLC in New York is a great advantage if you wish to stake your hold in the world market;
• Access to capital. It goes without saying that New York City remains on the top as regards capital attracting, thus boosting business development within the Empire State. A massive amount of investments flows to New York companies falling within finance, real estate, high technology, and many other spheres. So, it is much easier to search for a starting capital and to build your empire in The Empire State;
• LLC unlimited duration. Unlike most other states, New York provides eternal duration for limited liability companies;
• Managers removal. Unless otherwise provided in the operating agreement, New York allows the manager's removal by simple voting, helping business owners make quick management decisions.

New York LLC Disadvantages

• Publishing requirement. For New York LLCs vs Delaware, an expensive publication is required for qualification to do business;
• Need for Operating Agreement. It is mandatory for every New York LLC to have a written operating agreement within 90 days. Failing to do so will become the subject of litigation;
• Annual reports and biennial statements. If New York limited liability companies fail to file their reports and statements by the due date, their certificates of good standing will be revoked and their ventures can be administratively dissolved;
• Tax burden. Even though all company members do pay their income taxes, New York imposes an annual filing fee on any limited liability company.

New York LLC vs Delaware LLC: How About Fees and Taxation

The summary table below represents a comparison between essential fees and taxes obligatory for Delaware vs New York LLC formation.

Conclusion

Multiple business opportunities, colossal investments, and LLC perpetuity make New York attractive for ambitious businesses. Still, forming a limited liability company in Delaware allows you to take advantage of their business-friendly laws and zero sales taxation. All in all, the choice between incorporating in New York vs Delaware will be based on particular facts and circumstances of the business.