When it comes to establishing a limited liability company (LLC), entrepreneurs and business owners often find themselves at a crossroads, faced with the crucial decision of where to establish their business.
Two states that frequently stand out as attractive options are Delaware and Tennessee.
Both offer unique advantages and considerations, making the choice between the two a pivotal one in the journey of business formation.
In this comprehensive side-by-side comparison, we’ll explore the key factors that set Delaware and Tennessee apart, equipping you with the knowledge needed to make an informed decision that aligns perfectly with your business goals and aspirations.
Delaware vs. Tennessee LLC
Delaware
Favorable Business Laws
Delaware is renowned for its business-friendly legal environment.
The state offers well-established corporate law that is highly predictable and favorable to businesses, providing clarity and stability for LLC owners and investors.
Privacy and Flexibility
Delaware allows business owners to maintain a high degree of privacy and flexibility in managing their LLCs.
Members’ and managers’ names and addresses can remain confidential, and the operating agreement can be highly customized to suit the specific needs of the business.
Tennessee
No State Income Tax
Tennessee is often chosen for its absence of a state income tax.
This can be a significant advantage for LLC owners, as it means that the LLC itself is not subject to state income tax, potentially reducing the overall tax burden on the business.
Low Operating Costs
Tennessee is known for its low cost of living and doing business.
Lower real estate prices, affordable labor, and a generally lower cost of living make it an attractive state for businesses looking to keep their operating expenses in check.
| Delaware LLC | Tennessee LLC |
|---|---|
| Delaware has a lower filing fee but an annual franchise tax of $300. | Tennessee has a higher initial filing fee of $300 but no annual franchise tax. |
| It imposes a state income tax ranging from 2.20% to 6.60%. | It does not have an individual income tax, which is advantageous for members. |
| Delaware does not have a state sales tax, benefiting retail businesses. | Tennessee has a 7% state sales tax, impacting sales of taxable goods. |
| It has a corporate income tax rate of 8.70%. | It levies a lower flat corporate income tax rate of 6.50%. |
| Delaware has a strong legal precedent, known for corporate-friendly court decisions. | Tennessee’s legal system may be less predictable compared to Delaware. |
| It allows for member and manager privacy, not disclosing names and addresses. | It requires a registered agent with a physical address within the state. |
| Delaware offers flexibility in creating operating agreements. | Operating agreements can be highly customized in both states. |
Cost Breakdown of The Two
You may use our free LLC cost calculator by state to find out filing fees, tax percentages, income taxes, and more.
Delaware:
Filing Fee: $90
Annual Franchise Tax: $300
Registered Agent Fee: $100 to $300
Tennessee:
Filing Fee: $300
Annual Report Fee: $300
Registered Agent Fee: $100 to $300
Related Posts:
- Delaware LLC: Cost Breakdown, Pros and Cons, Requirements
- Tennessee LLC: Cost Breakdown, pros and cons, requirements
Similarities Between Delaware and Tennessee LLC
Limited Liability Protection
In both Delaware and Tennessee, LLC members enjoy limited liability protection.
This means that the personal assets of the members are typically shielded from the business’s debts and liabilities.
This protection is a fundamental advantage of choosing the LLC structure in either state.
Operating Flexibility
Both states offer flexibility in how LLCs can be structured and managed.
Members can determine the management structure and operating agreements, allowing for customized management and governance.
Registered Agents
In both states, LLCs are required to have a registered agent with a physical address in the state.
The registered agent is responsible for receiving legal documents and official correspondence on behalf of the LLC.
Business-Friendly Environments
Delaware and Tennessee are known for their business-friendly environments.
They have well-established legal systems, accessible state agencies, and efficient processes for LLC formation and operation.
Privacy Provisions
Both states provide some level of privacy for business owners.
Delaware, for example, allows members’ and managers’ names to remain confidential, while Tennessee also provides privacy protections in its business filings.
No Minimum Capital Requirement
Neither Delaware nor Tennessee imposes a minimum capital requirement for forming an LLC, making it accessible for businesses of various sizes and financial capacities.
Additional Resources:
Steps to Form LLC in Delaware
Choose a unique name for your LLC, following Delaware’s naming requirements.
Designate a registered agent with a physical address in Delaware.
File the Certificate of Formation (Articles of Organization) with the Delaware Division of Corporations, paying the filing fee.
Consider drafting an Operating Agreement, although it’s not mandatory in Delaware.
Obtain an EIN (Employer Identification Number) from the IRS for tax purposes.
File an Annual Report and pay the associated fee to maintain good standing.
Ensure compliance with any required business licenses or permits.
Pay Delaware’s annual franchise tax based on your LLC’s specific circumstances.
Operate your Delaware LLC in accordance with your Operating Agreement and applicable laws.
Steps to Form LLC in Tennessee
Choose a unique name.
Appoint a registered agent.
File Articles of Organization.
Consider creating an optional operating agreement.
Obtain an EIN (Employer Identification Number) from the IRS.
File the initial report within 90 days.
Pay the required state fees.
Comply with state tax and regulatory requirements and file annual reports as needed.
Feature Comparisons Between Delaware LLC vs. Tennessee LLC
Delaware LLC
Strong Legal Precedent: Delaware has a well-established and predictable legal system with a history of corporate-friendly court decisions.
This makes it an attractive option for businesses seeking legal stability.
Chancery Court: Delaware has a specialized court system, the Chancery Court, dedicated to resolving business disputes.
This court’s expertise in corporate law can be advantageous for businesses involved in litigation.
Privacy and Flexibility: Delaware allows members and managers to remain confidential, offering a level of privacy and flexibility in the operation of an LLC.
Tennessee LLC
No State Income Tax: One of the most significant advantages of a Tennessee LLC is the absence of a state income tax.
This is beneficial for LLC members, as they don’t pay state income tax on their LLC earnings.
Low Operating Costs: Tennessee is known for its low cost of living and doing business, making it an attractive choice for businesses looking to keep their operating expenses in check.
Sales Tax: Tennessee has a 7% state sales tax, which can be a consideration for businesses involved in retail or selling tangible goods.
Business Environment
Delaware LLC Business Environment
Strong Legal Precedent
Delaware is renowned for its well-established legal system, which has a history of corporate-friendly court decisions.
This makes it a favored choice for businesses looking for legal stability and predictability.
Specialized Chancery Court
Delaware’s Chancery Court is dedicated to resolving business disputes.
Its expertise in corporate law and a panel of experienced judges can expedite the resolution of business-related legal matters.
Privacy and Flexibility
Delaware allows LLC members and managers to remain confidential. Additionally, the operating agreement can be customized to suit the specific needs of the business.
Favorable Business Laws
Delaware’s corporate law is highly predictable and favorable to businesses. It offers a clear and established legal framework.
Tennessee LLC Business Environment
No State Income Tax
Tennessee does not have an individual income tax. This is a significant advantage for LLC members as they are not subject to state income tax on their LLC earnings.
Low Operating Costs
Tennessee is known for its low cost of living and doing business. Lower real estate prices, affordable labor, and a generally lower cost of living can be appealing to businesses.
Local Support and Networking
Tennessee offers a vibrant business community with access to local support and networking opportunities.
This can be valuable for small businesses and startups looking to connect with other entrepreneurs and resources.
Read Also:
- 30 Best Business Ideas in Delaware
- 27 Best Business Ideas in Tennessee
- 20 Reasons and Scenarios When a Foreign LLC is Useful
Delaware vs. Tennessee Taxes
Delaware Taxes
1. State Income Tax
Delaware has a progressive state income tax, ranging from 2.20% to 6.60% on individual and corporate income.
LLC members may be subject to state income tax on their share of LLC profits.
2. Sales Tax
Delaware does not have a state sales tax, which can be advantageous for businesses involved in retail or the sale of tangible goods.
3. Corporate Income Tax
Delaware levies a corporate income tax of 8.70% on corporate profits, which can apply to certain types of businesses.
Tennessee Taxes
1. State Income Tax
Tennessee does not have an individual income tax, making it highly favorable for LLC members. Members are not subject to state income tax on their share of LLC earnings.
2. Sales Tax
Tennessee has a 7% state sales tax, which can impact businesses involved in retail or the sale of taxable goods. There are exemptions for certain items and industries.
3. Corporate Income Tax
Tennessee imposes a flat corporate income tax rate of 6.50% on corporate profits. This tax applies to certain businesses operating in the state.
Flexibility in Rules and Regulations
Delaware LLC
Delaware offers substantial flexibility in drafting the operating agreement, which governs the internal affairs of the LLC.
Members can customize the agreement to suit their specific needs, specifying how the LLC will be managed, how profits and losses will be allocated, and other key aspects of the business.
Delaware allows LLCs to choose between being manager-managed or member-managed. This flexibility enables businesses to determine who will make day-to-day operational decisions.
It allows LLC members and managers to remain confidential.
While the names and addresses of these individuals are typically not disclosed in public records, they are still required to maintain a registered agent within the state.
Tennessee LLC
Tennessee offers flexibility in creating the LLC’s operating agreement, allowing members to define their own rules for management, profit distribution, and other internal matters.
It allows LLCs to choose between manager-managed and member-managed structures, giving businesses the ability to decide who oversees daily operations.
Tennessee, like many states, requires LLCs to designate a registered agent with a physical address within the state. While this isn’t a flexibility, it’s a standard requirement for LLCs.
Key Differences Between Delaware and Tennessee
