7 Costly Mistakes to Avoid When Forming a Delaware LLC (And How to Avoid Them)

When it comes to forming a Delaware LLC, you’ve probably heard the same thing from countless entrepreneurs, lawyers, and business gurus: “Delaware is the best state for forming your LLC.” 

But why is that the case? 

Well, here are some quick facts: Over 68% of Fortune 500 companies are incorporated in Delaware. 

This tiny state has business-friendly laws, a highly respected Court of Chancery that handles corporate cases, and doesn’t require businesses to have a physical office there — meaning you can benefit from Delaware’s legal system no matter where you are.

Just because Delaware is the popular choice for forming an LLC doesn’t mean the process is free of challenges. In fact, jumping into the formation process without fully understanding it can lead to costly errors, delays, and unnecessary stress. 

That’s why doola is here to help you with a seamless LLC formation process.

So, let’s dive into some of the most common mistakes people make when forming a Delaware LLC — and how to dodge them like a pro.

1. Choosing the Wrong Business Structure

One of the first and most important decisions when forming a Delaware LLC is choosing the right business structure.

Many entrepreneurs rush into creating an LLC because they’ve heard it offers great flexibility and personal liability protection.

While that’s true, an LLC isn’t always the best choice for every business.

For example, some businesses might benefit more from an S-Corp due to the tax advantages, or a partnership may be a better fit for companies with multiple owners.

If you choose the wrong structure, you could end up facing higher taxes, unnecessary complexity, or issues with liability.

How to Avoid It:

Take time to evaluate your options. Consider your long-term goals, how you want your business to be taxed, and how much personal liability you’re comfortable with. 

Consulting with a formation pros like doola can help you figure out which business structure is the best fit for your company needs.

2. Not Filing the Proper Paperwork

You wouldn’t believe how often paperwork gets filed incorrectly or even forgotten altogether.

Missing a crucial signature, skipping a required document, or overlooking an important step can mean your LLC isn’t legally registered. 

In Delaware, you need specific documents, such as the Certificate of Formation, to officially establish your LLC.

If anything is done incorrectly or forgotten, it can lead to delays in your business launch, or worse, legal issues down the road.

How to Avoid It:

The key here is to be diligent and organized.

Create a checklist of all required documents, double-check everything before submission, and keep copies for your records. 

However, if all the paperwork sounds overwhelming (which it often is), consider using LLC formation services from doola.  Our experts will handle all the filings for you, ensuring everything gets submitted correctly the first time.

This way, you avoid the frustration of back-and-forths and can pay attention to other core business tasks.

3. Skipping the Operating Agreement

Many people assume that because they’re the sole owner of their Delaware LLC, they don’t need an Operating Agreement.

But that’s a huge misconception! 

Even if you’re the only member, an Operating Agreement is essential for outlining how your business will operate, how profits will be distributed, and what happens in the event of legal issues.

How to Avoid It:

Draft an Operating Agreement as soon as your LLC is formed. Even if you’re running a single-member LLC, this document can protect you legally and financially.

If you’re unsure how to get started, our experts can help you create an Operating Agreement that’s tailored to your business needs.

4. Ignoring Delaware Franchise Taxes

A surprising number of business owners forget that forming a Delaware LLC comes with an ongoing financial obligation: the annual franchise tax. 

While Delaware is known for its business-friendly environment, the state still expects LLCs to contribute via this tax each year.

Failing to pay can result in more than just a slap on the wrist and penalties can pile up quickly, and in severe cases, your LLC could even be dissolved. 

This tax isn’t based on your income, so even if your business isn’t making a profit yet, the state still expects payment.

What often trips up new business owners is not knowing about this tax in the first place or underestimating how crucial it is to stay on top of deadlines. 

It’s not something you can brush off and handle later; Delaware’s penalties for missed franchise tax payments can lead to financial stress.

And no one wants to be hit with unexpected fines.

How to Avoid It:

The best way to dodge this pitfall is to plan ahead.

As soon as your Delaware LLC is formed, mark your calendar with the franchise tax due date — typically March 1st for most LLCs. 

Set up multiple reminders, whether through your phone, email, or project management tools, to ensure you don’t miss it. 

Alternatively, make life easier by using doola’s tax filing services. Our seasoned experts are here to do all the filings but also send timely reminders to keep you compliant year after year.

This way, you’ll never be caught off guard by a looming deadline or late fee.

5. Mixing Personal and Business Finances

One of the most common mistakes new business owners make is mixing their personal and business finances. It might seem harmless at first — using your personal bank account to pay for business expenses or vice versa. 

But this can create a tangled financial web that’s a nightmare to untangle, especially during tax season.

Beyond the bookkeeping mess, combining finances can fog the lines between your personal and business assets, which can lead to serious issues if your business is ever audited or faces legal trouble.

Plus, if your business runs into debt or legal disputes, not having clear financial separation can expose your personal wealth to potential liabilities. This defeats one of the major advantages of forming an LLC, which is protecting your personal assets from your business’s liabilities. 

How to Avoid It:

The solution is simple: as soon as your Delaware LLC is formed, open a dedicated business bank account.

This way, your business expenses are clearly documented and separate from your personal spending. It also shows the IRS and any potential creditors that your LLC is a legitimate, standalone entity, which is quite essential for maintaining your limited liability status. 

Plus, it makes bookkeeping way easier. Just imagine no more headaches trying to figure out which expenses were for business and which were personal! 

Banks like Mercury offer seamless, online business banking options that make this process straightforward, so you can stay organized and focus on growing your business without the financial chaos.

6. Not Getting an EIN

One common misconception among solo entrepreneurs is thinking that they don’t need an Employer Identification Number (EIN) if they’re the only person in the business.

It’s an easy assumption to make. After all, you’re not hiring anyone else, so why bother, right? Wrong! 

An EIN isn’t just for businesses with employees. It’s a powerful and legal identifier for the IRS, and without one, you could be inviting yourself some serious headaches.

Even if you’re the sole member of your Delaware LLC, an EIN is necessary for several key reasons.

First, it’s essential for tax purposes, especially when it comes to filing your federal taxes and dealing with state-level requirements. 

Without an EIN, you may end up using your Social Security Number for business matters, which not only complicates things but also increases the risk of identity theft.

Beyond taxes, you’ll also need an EIN to open a business bank account. Banks typically won’t let you open a dedicated business account without one, and as we’ve discussed, keeping personal and business finances separate is a must for protecting your assets. 

Additionally, if you ever decide to hire employees or independent contractors, an EIN will be required to handle payroll and report employment taxes properly.

How to Avoid It:

The good news is that getting an EIN is free and relatively simple.

As soon as your Delaware LLC is formed, apply for your EIN through the IRS website — it’s a quick process that can be done online, and you’ll receive your EIN. 

If you’d rather not deal with the hassle yourself, doola can handle it for you, ensuring that everything is in order from the start.

This small step will save you a lot of trouble down the road and ensure your business is set up properly from day one without any IRS related hiccups.

7. Forgetting About Compliance Obligations

After the excitement of forming your Delaware LLC, it’s easy to overlook the ongoing responsibilities that come with keeping it compliant.

But don’t get carried away. Just because your LLC is officially formed doesn’t mean you can sit back and relax. 

Delaware requires businesses to meet specific annual compliance obligations, like filing reports and paying franchise taxes, to remain in good standing. 

Skipping these requirements can have serious consequences, from late fees to the outright dissolution of your LLC.

And here’s the tricky part: the state doesn’t always send friendly reminders.

How to Avoid It:

The key is staying organized. Set up a compliance calendar with all your important deadlines, like filing dates for your annual report and franchise taxes. 

Use reminders or alerts to make sure nothing slips through the cracks.

If managing compliance feels overwhelming, consider using digital tools or assigning the task to someone in your team to stay ahead of the deadlines.

How to Avoid Mistakes When Forming Your Delaware LLC

Now that we’ve covered the most common mistakes, let’s dive into practical ways to stay away from these pitfalls and ensure a smooth Delaware LLC formation.

Whether you’re a first-time entrepreneur or a seasoned business owner, staying organized and proactive is key. 

Here’s how to avoid these costly mistakes:

Consult With Professionals

Don’t hesitate to seek expert advice. Whether it’s from a lawyer, accountant, or LLC formation service like doola, consulting with professionals ensures you make informed decisions about your business structure, tax obligations, and legal compliance. 

Professionals can help you with tricky paperwork and keep you aware of deadlines, so you avoid the common mistakes discussed above.

Stay Organized

Create a checklist to track every essential step in the LLC formation process.

This includes obtaining your Certificate of Formation, filing the proper paperwork, and setting reminders for compliance obligations like annual reports and franchise taxes.

Use project management tools or apps to stay on top of key dates and paperwork submissions.

Separate Your Finances

Open a business bank account as soon as your Delaware LLC is formed. This is crucial for maintaining financial clarity and ensuring that your personal assets remain protected.

Use bookkeeping software to track business expenses and profits separately from your personal finances.

Create an Operating Agreement

Draft an Operating Agreement even if you’re the sole member of your LLC. This internal document outlines how your business operates and helps resolve any future disputes.

Ensure the Operating Agreement is comprehensive and up-to-date as your business grows or changes.

Apply for an EIN Early

Obtain an Employer Identification Number (EIN) from the IRS as soon as your LLC is formed. This is necessary for tax filing, hiring employees, and opening a business bank account.

Don’t risk using your Social Security Number for business purposes — it can complicate tax filing and increase identity theft risks.

Use a Compliance Calendar

Set up reminders for key deadlines, including annual reports, tax filings, and renewals, to stay on top of your LLC’s obligations.

Want to Avoid Delaware LLC Formation Mistakes? doola Can Help!

Navigating the process of forming a Delaware LLC can be overwhelming, but this is where doola steps in to make things easier for your new business journey. 

doola’s expertise lies in guiding business owners through each step of LLC formation, ensuring that the most common LLC and formations mistakes are avoided at any cost.

Here’s how doola can help:

✅ Expert Guidance: Our team of experts can help you choose the right business structure, making sure you’re not stuck with a setup that could cost you more in the long run.

✅ Seamless Paperwork Handling: We manage all the required filings — from the Certificate of Formation to obtaining your EIN — so you don’t have to worry about missing important documents or deadlines.

✅ Compliance Assistance: doola helps you stay on top of your annual reports, franchise taxes, and other ongoing compliance obligations, ensuring your business remains in good standing year after year.

✅ Tailored Support: Whether you’re running a single-member LLC or a more complex operation, doola offers customized solutions that fit your business needs, removing all the misconception  from the formation process.

Forming a Delaware LLC doesn’t have to be overwhelming. With the right help, you can breeze through the process and start building your business with confidence. 

Ready to start your Delaware LLC the right way?

Book a free consultation with our experts and see how you can check off everything on your LLC formation checklist.