Setting Up an LLC in Delaware vs. New Jersey: Key Differences You Should Know
In the first article of our business formation series, we explored the different types of entities available to business owners, such as partnerships, corporations, and limited liability companies (LLCs), and why a New Jersey business lawyer can make the process easier. We highlighted that LLCs offer the benefits of both corporations and partnerships—they protect owners' assets from liability and provide pass-through taxation, where the LLC's profits and losses are reported on the members' personal income tax returns.
The second article discussed factors to consider when choosing a state to form your business, including tax rates, legal environment, and business-friendly laws. Today, we'll delve deeper into selecting the state of formation for your business. Specifically, we'll compare two of the most popular jurisdictions for forming a limited liability company: New Jersey and Delaware. We'll analyze these states based on the following:
Legal Framework and Business Environment
Member Rights
Administrative Costs
Let's dive in!
Comparing New Jersey and Delaware When Forming Your LLC
Here's what you need to know about setting up an LLC in Delaware vs. New Jersey:
Legal Framework and Business Environment
The statutory frameworks in Delaware and New Jersey define how limited liability companies are formed, operated, and dissolved. Understanding these laws is crucial when choosing where to establish your business entity.
New Jersey
The New Jersey Revised Uniform Limited Liability Company Act (NJRULLCA) provides significant contractual freedom, making New Jersey an attractive jurisdiction for forming your LLC. This act offers a broad scope for your operating agreement, allowing LLC members to define many aspects of business management, including customizing capital contributions and profit distributions. Furthermore, it gives your limited liability company the flexibility to choose between member-managed and manager-managed structures, depending on your business needs.
Members of a New Jersey LLC can also modify or eliminate certain fiduciary duties, except for the duty of good faith and fair dealing. This means business owners can tailor their operating agreements for greater decision-making authority without being constrained by fiduciary duties like the duty of loyalty and the duty of care.
Delaware
The Delaware Limited Liability Company Act governs the formation, operation, and dissolution of LLCs in Delaware. Established in 1992 and frequently updated to address emerging issues, it offers business-friendly laws that appeal to entrepreneurs. Like the NJRULLCA, the Delaware act allows for extensive customization of operating agreements, including modifying or eliminating fiduciary duties except for the implied contractual covenant of good faith and fair dealing.
Delaware also permits the creation of a wide range of LLC governance structures, from member-managed to manager-managed, and allows for different classes of membership with customized voting rights. This flexibility provides significant contractual freedom for your Delaware LLC.
Member Rights
Member rights define the legal privileges and responsibilities of LLC members, influencing their involvement in operations, access to information, and participation in financial and management decisions. The default provisions for member rights differ significantly between a Delaware LLC and a New Jersey LLC.
New Jersey
In New Jersey, unless the operating agreement states otherwise, all members of a limited liability company have equal voting rights in the daily management and operation of the business. The NJRULLCA provides clear guidelines for member withdrawal and outlines the rights of dissociated members. This means that, by default, members in a New Jersey LLC have significant involvement and clearly defined exit strategies.
Delaware
Delaware LLCs offer flexibility in establishing any management structure. However, the default rules may be less favorable to passive members. Without specific provisions in the operating agreement, members might have limited voting rights and restricted access to information. Additionally, Delaware does not provide default rights for members to withdraw from the LLC—this must be explicitly detailed in the operating agreement. Therefore, it's crucial to craft a comprehensive operating agreement for your Delaware LLC to ensure all member rights are adequately protected.
Administrative Costs
When deciding where to form your limited liability company, understanding the costs involved can help you select a jurisdiction that is aligned with your budget.
New Jersey
Forming a New Jersey LLC requires filing a Certificate of Formation with the New Jersey Division of Revenue, accompanied by a $125 filing fee. Once your business entity is established, you must file an annual report each year at a cost of $75.
As a New Jersey LLC taxed as a partnership, your company's profits and losses pass through to the individual members, who report them on their personal income tax returns. If your LLC elects to be taxed as a corporation, it will be subject to New Jersey's Corporate Business Tax, which ranges from 6.5% to 11.5%. Additionally, business owners must pay state unemployment insurance and disability insurance taxes for their employees. Finally, New Jersey requires LLCs to maintain a registered agent within the state.
Delaware
Forming a Delaware LLC involves filing a Certificate of Formation with the Delaware Division of Corporations, with a filing fee of $90. Unlike New Jersey, Delaware LLCs are not required to file annual reports, saving some administrative costs. However, they must pay an annual franchise tax of $300, due by June 1 each year.
Like in New Jersey, profits and losses of a Delaware LLC taxed as a partnership pass through to the members' personal tax returns. However, for an LLC taxed as a corporation, there is no Delaware corporate income tax. Finally, Delaware requires LLCs to maintain a registered agent with a physical address in the state.
Conclusion
We hope this article has clarified the different requirements for setting up an LLC in Delaware versus New Jersey. Understanding these distinctions is crucial for making an informed decision about where to form your limited liability company.
We invite you to join us for the next article in our business formation series, where we will explore the nuances of setting up a corporation in Delaware vs. New Jersey.
Are you wondering about any of the issues mentioned above? Please email us at Info@staturelegal.law or call (732) 320-9831 for assistance.
At Stature Legal, our New Jersey business lawyers give business owners the clarity they need to fund, grow, protect, and sell their businesses. We are trustworthy business advisors keeping your business on TRACK: Trustworthy. Reliable. Available. Caring. Knowledgeable.®