Delaware at a glance
Partnership law
RUPA (revised)
LLC default split
Proportional to capital
Operating agreement
Required (oral OK)
Community property
No
Formation cost
$110
Annual cost
$300 annual franchise tax
Delaware is the most popular state for business formation, especially for venture-backed startups and large corporations. Its Court of Chancery, a specialized equity court without juries, handles business disputes with deep expertise. Delaware's LLC Act is uniquely flexible: it allows operating agreements to eliminate fiduciary duties entirely, and members cannot withdraw from an LLC by default. Delaware does not tax income from LLCs that do not operate in the state.
Default partnership rules in Delaware
Delaware adopted a modified version of RUPA. Profits and losses are shared equally by default. Delaware's partnership law is notable for its flexibility in allowing the partnership agreement to modify default rules extensively, including fiduciary duties. The state's Court of Chancery provides specialized business dispute resolution with experienced judges and no juries, which produces more predictable outcomes.
The most important takeaway: profits are split equally by default in Delaware, regardless of capital contributions. If you and a partner start a business and one of you invests $100,000 while the other invests $5,000, you still split profits 50/50 without a written agreement. This is true in every US state, including Delaware.
LLC defaults in Delaware
Delaware's LLC Act is considered the gold standard for flexibility. By default, profits and losses are allocated in proportion to capital contributions. However, Delaware is unique in allowing operating agreements to eliminate fiduciary duties entirely, which no other state permits to the same degree. Members cannot withdraw from a Delaware LLC by default, meaning there is no right to demand the return of a capital contribution unless the operating agreement provides for it. Delaware requires LLCs to have an operating agreement (oral or written). The $300 annual franchise tax applies regardless of income.
Delaware defaults to proportional distributions based on capital contributions, which aligns better with many founders' expectations than equal-split states. However, capital contributions alone rarely tell the full story. A founder contributing time and expertise may receive nothing if they didn't invest cash. An operating agreement can account for all types of contributions. Our equity calculator can help you determine a fair arrangement.
What happens when a partner leaves in Delaware
Delaware's LLC Act does not give members a default right to withdraw. A member cannot simply leave and demand a buyout unless the operating agreement specifically allows it. This is very different from most other states. For partnerships under RUPA, a partner can dissociate without dissolving the partnership, and is entitled to a buyout at fair value. The Court of Chancery handles dissolution disputes with specialized expertise.
A written partnership agreement should still address departure terms specifically, including how the buyout value is calculated, the payment timeline, and any non-compete provisions. While RUPA provides a default framework, the details of a buyout can still lead to disputes if not spelled out in advance. Understanding the concept of dead equity is important for managing these situations. Learn more about how dead equity affects businesses.
Marriage and business equity in Delaware
Delaware is an equitable distribution state. Business interests are divided equitably in a divorce, based on factors like the length of the marriage, each spouse's contributions, and economic circumstances. Delaware courts distinguish between marital and non-marital property, and a business started before marriage may be treated differently from one started during the marriage. The increase in value of a pre-marital business during the marriage may be considered marital property.
Even though Delaware is not a community property state, marriage can still affect your business equity. In equitable distribution states, courts divide marital property based on what is fair, which may include business interests acquired or grown during the marriage. A clear equity agreement and proper documentation of ownership can help protect your business in the event of a divorce.
Formation and cost considerations in Delaware
| Formation cost | $110 |
| Annual/recurring cost | $300 annual franchise tax |
| State income tax | Yes |
| Partnership law | RUPA (revised) — partnership continues after departure |
| LLC default distributions | Proportional to capital contribution |
| Operating agreement | Required (oral or written) |
Frequently asked questions
Why do so many companies form in Delaware?
Delaware offers the most flexible business formation laws in the country, a specialized Court of Chancery with deep expertise in business disputes, no state income tax on out-of-state income, and a well-developed body of case law that makes legal outcomes more predictable. Venture-backed startups often form in Delaware because investors and attorneys are familiar with its laws.
Can a Delaware LLC eliminate fiduciary duties?
Yes. Delaware is unique in allowing operating agreements to eliminate fiduciary duties entirely, including the duties of loyalty and care. This level of flexibility is not available in any other state to the same degree. While this can be useful for certain investment structures, most operating businesses should retain some form of fiduciary duties to protect members.
Can members withdraw from a Delaware LLC?
No, not by default. Unlike most states, Delaware does not give LLC members a default right to withdraw and demand a return of their capital contribution. Members can only withdraw if the operating agreement specifically allows it. This means founders need to address exit rights in the operating agreement, or they could be locked into the LLC indefinitely.
How much does a Delaware LLC cost annually?
Delaware charges a $300 annual franchise tax for LLCs, regardless of income. The initial formation fee is $110. If you do not operate in Delaware, there is no state income tax. However, if you operate in another state, you will likely need to register as a foreign LLC there and pay that state's fees as well, so Delaware formation often means paying fees in two states.
Related resources
- Equity calculator: find a fair split for your business
- Does your small business need an equity agreement?
- Equity for small businesses: the complete guide
- Dead equity calculator: how much is yours costing you?
- Slicing Pie calculator
- What is an operating agreement?
- All 50 states: partnership and LLC default rules
Partnership laws in neighboring states
Disclaimer: This page provides general information about Delaware partnership and LLC default rules and is not legal advice. Laws change, and the information here may not reflect the most recent amendments. The formation costs and annual fees listed are approximate and may vary. Consult a qualified attorney licensed in Delaware for advice specific to your situation. Equity Matrix is a software tool for tracking contributions and calculating equity; it does not provide legal services.
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