Are there downsides to setting up an LLC in my search state not Delaware?

October 30, 2020

by a searcher from Harvard University in Boulder, CO, USA

I am starting a self-funded, geographically restricted search in the DC area (DC, Maryland, Virginia). I will be searching from DC itself. Two questions:

- Are there any downsides to not using a Delaware LLC? What I've read online is you often have to set up a foreign company in your search state if the LLC is external which just sounds like extra complexity
- Is the LLC I set up to search the same one that will purchase the company? This is relevant for me because DC taxes ~10% of district-based LLC profits

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Reply by an investor
from University of Virginia in Tampa, FL, USA

I think most self-funded, geo-focused searchers set up entities in their "home" state. It's simple, quick and inexpensive. Delaware is popular as an out-of-state choice because of advanced corporate laws and confidentiality, but it adds to complexity and cost -- which is why most self-funded searchers don't use Delaware. As for the purchase, it depends. Some use the same entity, while others create a new entity, to acquire the target's assets. You can always change gears later if you are self-funded- the initial entity is just to consolidate expenses, sign NDAs, etc. -- it won't be revenue producing until after you have a deal closed. But, of course, plz confirm with your atty.

Reply by a searcher
from Harvard University

Incorporating in Delaware is to provide your company with the most advantageous law should you get sued. But it's likely not so important for the search, and you can (and likely will) set up a new LLC or S-Corp for the acquisition. So I'd set your search up locally. That also lets you avoid additional costs. (Setting up locally you can do yourself pretty easily (esp. an LLC), setting up in DE you might need a lawyer and, since you don't have a DE address, you will definitely have to pay a DE company an annual fee to act as your registered agent.

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