The names Texas and Delaware often come up when discussing which state should you be choosing when forming your new LLC. Both of these are considered popular options amongst entrepreneurs.
Yet, these two states are completely different from one another. While Delaware is a rather small and idle state in the northeastern corner of the US, Texas is one of the most happening states with bustling cities.
Due to their vastly different characteristics, you can expect unique characteristics from the two states, making it hard to pick one.
Today, we’ll bust the myths surrounding the two states regarding Texas vs. Delaware LLC formation, and leave you with enough information to make a decision. So, let’s get to it.
Texas LLC
This section will contain all information regarding the formation to the characteristics of forming an LLC in Texas. We have created a step-by-step guide on “Steps to Forming LLC in Texas“. Be sure to read this to understand more about forming an LLC in Texas.
Texas’s LLC Formation Process
The following steps must be followed in order to form an LLC in Texas:
Getting Started
Before getting into the filing and processing, you need to choose a name for your LLC and designate an agent. The name has to be unique from the businesses already existing in Texas. You can check if your desired name is available or not on the Texas Secretary of State Website.
Secondly, you must hire a registered agent to process the legal documents on behalf of your business.
Filing Certificate of Formation
You need to file a certification of formation to show that you’ve officially formed your LLC. You’ll need form 205 and you can order this form either via mail or online. It’ll cost $300.
Get an Employer Identification Number
Similar to the Social Security number of an individual, The EIN (Employer Identification Number) is that to a business as it leaves a trace to all the business activities. It is basically a unique 9-digit number for your company recognized by the Internal Revenue Service for taxes and finances of a business.
If your LLC has a lot of members, then you need to get an EIN. The added benefits of an EIN are that it’ll keep your personal and business finances separate, and the track record can enhance your business reputation in making deals with clients as well as prevent you from identity theft and help you create business bank accounts.
Check and Apply for Sales Tax Permit
Whether you need to register for the state taxes in Texas depends completely on the location and type of your business. You need to check with the Texas Comptroller of Public Accounts website and register for Texas Sales Tax Permit if it’s required of you.
Timeline and Processing
The time required for this whole process varies from business to business. Expect to spend anywhere from a few working days to weeks. Ideally, it shouldn’t require more than a month. You can spend an extra fee of $25 to expedite this process.
Taxation Matters: Understanding Texas’s Tax Structure
Income Tax Implications for Texas LLCs
Generally, LLCs in Texas are taxed as pass-through entities. So, the LLC itself won’t have to pay any income tax to the state. The gains and losses are passed down to the owners, and the income is reported on their individual tax returns.
If you single-handedly maintain your LLC, it’ll be considered as “Sole-proprietorship”. If there are multiple members, then you’ll have to report your income to the IRS annually. Even then, the tax has to be paid by the individuals.
Sales Tax Considerations
If you sell any goods through your LLC, you’ll have to pay sales tax. The sales tax rate for Texas is 6.25%. However, taxing authorities can add up to another 2% on it, in which case you’ll have to pay 8.25% in total.
Advantages of Forming an LLC in Texas
Here are some of the advantages you can expect out of a Texas LLC:
Accessibility to a Large Market
Texas has an existing market that’s very large. By forming an LLC in Texas, you’re keeping the option of tapping into this market at any given time.
Perpetuity
LLCs in Texas can function in perpetuity regardless of the number of members being added or eliminated from the initial list.
No Personal Income Tax
Texas is one of the seven states in the US that doesn’t require businesses or individuals to pay personal income tax. This can be profitable for LLC members as they won’t have to pay for the tax on the shares of LLC profits.
Challenges and Drawbacks
Despite the amazing advantages, you may want to check if any of the following drawbacks would be a dealbreaker to you or not.
Privacy Concerns
The state of Texas does not require the full disclosure of the LLC members. This can be advantageous in many cases, but also disadvantageous if your clients prefer transparency.
Annual Franchise Tax
While Texas doesn’t impose an income tax, it does impose an annual franchise tax. This tax is based on the gross revenue of the LLC. You’ll have to pay it only if the revenue exceeds $1,230,000.
Delaware LLC
We’re done with Texas, so let’s take a look at how you can form an LLC in Delaware. We also covered on “Steps to Forming LLC in Delaware“. Now, let’s learn what advantages and disadvantages it’ll bring.
Delaware’s LLC Formation Process
In the following, I’ll discuss the Delaware LLC formation process in steps.
Getting Started
Start by naming your LLC. The name must comply with the requirements put forward by the state of Delaware. While searching for a name, ensure that a suitable URL is available for that name.
You must hire a registered agent to receive official legal documents on behalf of your LLC. The agent must have an address in Delaware.
Time Taken for Formation
Forming an LLC can take anywhere from two to three weeks in Delaware if you file it online. If you file it via mail, it may take up to four weeks. Just like Texas, you can apply for expedited LLC, which will charge you 50 bucks on top of the regular fee.
Cost
You’ll have to spend $110 to form an LLC and another $70 for a business license. The initial cost is low, but there’s an annual franchise tax of $300 to consider.
Taxation Matters: Delaware’s Tax Landscape
Property Tax
Property taxes in Delaware are assessed on a local level, and the specific rates differ from one county to another. However, when compared to the national averages, these rates are still significantly lower.
Personal Income Tax
Delaware implements a system of progressive state income tax where the rates go from 2.2% to 6.6%.
Advantages of Forming an LLC in Delaware
If starting an LLC in Delaware, these are all the benefits you can reap:
Taxation Flexibility:
Delaware lets LLCs select how they wish to be taxed. LLCs can choose to be taxed through pass-through taxation or as a corporation.
Court of Chancery:
The state of Delaware houses a specialized court named the Court of Chancery. This works in resolving business and corporate matters and is known for its efficiency in handling disputes.
Franchise Tax Structure:
Franchise tax is determined by the number of authorized shades, so LLCs with a smaller number of authorized shares can benefit greatly.
Challenges and Drawbacks
Apart from the amazing advantages, there are some negative aspects to keep in mind when opening an LLC in Delaware.
Higher Formation and Maintenance Costs:
Annual franchise taxes and initial filing fees are much higher in Delaware than many other states. If you are a small business or startup with limited capital, this might become a major issue.
No Personal Income Tax Benefits:
Residents of Delaware do not get personal income tax advantages, so if you are a member of any LLC registered in the state but you stay in a different state, you might still have to pay personal income tax in your state of residence.
Choosing the Right State: Texas Vs. Delaware LLC
In the following are the factors and metrics you need to assess before finalizing a state.
| Features | Texas | Delaware |
| File online | Available | Available |
| File by mail | Available | Available |
| Online approval time | Around 2 Weeks | 2-3 Weeks |
| Expedited filing | Unavailable | Available |
| Expedited filing fee | Unavailable | $50 |
| Expedited approval time | Unavailable | 24 hours |
| Maximum corporate tax rate | 0% | 8.7% |
Business Goals and Scope: Tailoring Your Choice
Target Market
Texas is the better option in this case for a number of reasons. It boasts a rapidly growing and rather diverse population. Being the second-most populous state in the U.S., Texas offers a broader customer base.
Thanks to the big population, the economy is also vibrant with many booming industries such as technology, education, healthcare, and manufacturing.
Growth Projections
Texas does not employ state income tax, which is a big plus for LLCs. Combine that with the diverse economy and market and you have an excellent choice for any business, be it a start-up or an established corporation.
The cost of living and operating a business in Texas are also lower in comparison to numerous other states so you will save a lot.
Taxation Considerations
When considering taxation, Texas holds a significant upper hand over Delaware thanks to its lack of state income tax.
Personal and Corporate Tax Impact
LLC owners in Texas can keep more of their business and personal income and eventually save more on taxes. Delaware does impose a progressive state income tax on individuals.
That being said, Texas imposes margin taxes on businesses which are calculated based on gross receipts, not net incomes.
Sales Tax Relevance
Texas imposes a state sales tax that changes based on location, usually ranging from 6.25% to 8.25%. This tax is applied on the sale of mostly tangible personal property alongside some services.
Business owners can enjoy the no state sales tax system in Delaware.
Legal Protections and Compliance
Asset Protection
In the event the LLC incurs debts or legal actions, personal belongings of the members are generally unharmed during the proceedings. This is because of the state’s robust personal property and homestead exemptions.
Delaware also provides solid asset protection for LLC members. Extensive case law and a well-established legal framework ensure an added layer of security, keeping personal assets separate from business liabilities.
Administrative and Reporting Requirements
There’s not much complication to the reporting process in Texas. A yearly LLC tax report is obligatory but given you follow the instructions properly, is basic work. Plus, there is no additional requirement of annual reports.
In Delaware, corporations have to submit both an annual report and a yearly franchise tax report. The only good thing here is that the system is simplified and most corporation owners have a sound understanding of it, so the workload is manageable.
Delaware is the winner as administrative burden will be one of the sectors of least concern here.
The Challenges of Privacy Protection
Delaware’s laws make it so LLC owners can enjoy a great level of privacy. Their names and addresses are not revealed in formation papers and thus, the business-friendly environment has safeguarded corporations for the longest time.
On the other hand, Texas carries a public record containing all the relevant information about businesses, including their names, office locations, registered agents and more. The idea is to increase transparency and make these LLCs more accessible to the people.
Legal Safety and Compliance
LLCs that wish to work beyond state lines generally have to fulfill a list of legal requirements and fill out lengthy paperwork. Texas-based LLCs can avail the efficient regulatory environment. However, when operating in different states, you will fall under special compliance and registration laws.
Delaware’s system bears resemblance to the one in Texas, but we think Texas holds an edge here due to the ease of operations offered and flexible business laws.
Conclusion:
Both Texas and Delaware offer some interesting perks. Yet, there are drawbacks to both of them. These states are so unique in this regard that it’s not possible to declare a clear winner between Texas vs Delaware LLC.
However, pinpointing your requirements will make it way easier. If you want to open your LLC in a state that has a lot of growth potential, you should go for Texas. On the other hand, Delaware offers great flexibility in terms of tax and legal system.
So, whichever state you go with, make sure it’s offering the right perks for your business.
