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| Why IncNow? Agents and Corporations, Inc.. has been a family owned and attorney-operated business since 1974. For over 30 years, entrepreneurs have trusted us to form their corporations and LLC's, for as little as $10 plus state and agent fees. More >> |
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What is an LLC?
A Limited Liability Company (LLC) is a business entity that is formed with the filing of a Certificate of Formation. An LLC provides limited liability to its members and taxation like a partnership, preventing double taxation.
People from all over the United States and the world flock to Delaware for the protection and flexibility of the Delaware LLC. For each of the past five years, the United States Chamber of Commerce has ranked the Delaware Court system number one of all 50 states in terms of fairness and competence. Choose the Delaware LLC for your business and you will enjoy the business-friendly rules that are more favorable than those available in any other state or foreign country.
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Key Attributes of the Delaware LLC
The Operating Agreement
The Owners (Members) and Managers
Voting Rights
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Why Form an LLC?
A common reason a business might choose to become an LLC is because of an LLC's tax classification flexibility - A new LLC incurring losses or owning capital appreciation assets like real estate operates as a sole proprietorship or partnership so that losses and capital gains pass through to the owners.
A service or profitable LLC might elect to operate as an S-Corporation to cut down on self-employment taxes. An LLC desiring to accumulate working capital or build equity may elect to be taxed as a C-Corporation.
Why is the LLC so Popular?
An LLC allows for the flexibility of a sole proprietorship or partnership structure while possessing limited liability (such as that granted to corporations). An advantage of an LLC, as opposed to a limited partnership, is that the LLC does not require a general partner. A General Partner is a managing partner in an LP that is exposed to personal liability. Two examples of the LLC’s flexibility compared to corporations are:
the lack of requirement for annual meetings of shareholders (LLCs have "members") and no requirement for Bylaws. Most LLCs will, however, choose to adopt a Limited Liability Company Operating Agreement, and this agreement is generally more complex than a corporation's bylaws.
One feature of the LLC, mentioned above, is that an LLC can elect how it should be treated for federal and state income tax purposes. An LLC with one owner is treated as a sole proprietorship by default (when an LLC has a single owner - either an individual or an entity - it is disregarded for federal taxes), but this one-owner LLC can also elect to be treated as a C-Corporation or as an S-Corporation.
Additionally, an LLC with more than one owner is treated as a partnership by default, but a multi-owner LLC can also elect to be treated as a C-Corporation or as an S-Corporation. To elect a C-Corporation treatment, an LLC files a Form 8832 with the IRS. To elect an S-Corporation treatment, an LLC files a Form 2553 with the IRS.
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LLCs vs. Corporations
Deciding to form an LLC cannot be a mistake. Your LLC can later be converted into a corporation and a corporation may be converted into an LLC at any time. From a tax angle, an LLC can elect to be taxed as a C-Corporation or an S-Corporation. In general an LLC is the preferred entity of choice. It is more flexible for U.S. and foreign owners, has fewer formalities than a corporation and just as much liability protection. Many commentators agree that the Delaware LLC has much more asset protection than a corporation.
Cases in which a Delaware LLC should be selected over a Delaware Corporation:
- Real estate or other passive investments will be purchased.
- Any owner will be a non-resident alien.
- Individuals are concerned about filing their names in state records.
- Tax benefits wish to be distributed disproportionately to ownership.
- The LLC will be used as a subsidiary or for a special purpose.
Cases in which a Delaware Corporation should be selected over a Delaware LLC:
- Companies intend to be listed on a stock exchange.
- Companies seek investors who want stock, not “interests” or “units.”
- Companies would like a corporate ending, such as "Inc."
- Non-Profit corporations.
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Advantages and Disadvantages of Forming an LLC
Advantages of Forming an LLC
- No required annual general meeting for shareholders.
- Much less administrative paperwork is involved.
- Default pass-through taxation (no double taxation).
- Owners of the LLC are protected from liability for acts and debts of the LLC.
- Profits are taxed personally at the member level, but not at the LLC level.
- Can be set up with just one person as the owner and manager.
- Check-the-box taxation: An LLC is taxed as a sole proprietorship or partnership unless it elects S-Corporation or C-Corporation tax status.
- Asset Protection: A Delaware LLC provides “Charging Order” as the exclusive remedy to personal creditors of a Member, giving a personal creditor an economic interest in the LLC without a control interest. This protects the other Members of the LLC from your creditors and visa-versa. Some other states allow a creditor to control or even liquidate an LLC to pay-off an outstanding judgment!
- Family Planning: Gifts of LLC Units can be discounted and be non-voting while the family leader retains voting control and management rights.
Disadvantages of Forming an LLC
- It may be more difficult to raise capital for an LLC since Venture Capitalists and old-fashioned investors may be more comfortable investing funds in corporations which have the potential of an initial public offering (IPO).
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Common Uses of an LLC
Common uses of the Delaware LLC include:
(Click on one of the following topics to learn more)
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Special Types of LLCs
The Delaware Series LLC: Many LLCs in One
Definition
Advantages
Unlike a conventional LLC in any other state, a Delaware Series LLC has the advantage of having multiple, even unlimited, liability baskets (or "series") under one organizational umbrella (the "company"). The Series LLC is tantamount to a number of separately filed LLCs. The protection is often called “ring fencing.” The protection afforded by this one entity, coupled with unlimited liability and asset segregation potential, makes the series LLC a very powerful and cost effective asset protection tool.
Additionally, the Delaware Series LLC allows for a large degree of anonymity and privacy, in that only the name of the LLC and the Registered Agent's name are listed with the State of Delaware (not the member’s name). (Should you desire a mail forwarding address, accountant or bank account in Delaware, we would be happy to make a referral). [Click Here to Learn More about Delaware Series LLC Advantages]
Operating Agreement
Usually the Series LLC is set up with a much longer and customized 50+ page Operating Agreement for the Series LLC. We will prepare a 50-page Operating Agreement for the Series LLC, ready for signature. We will send you both a hard copy and CD-ROM version (should you wish to edit the agreement or add additional series).
Separate Series Agreements
In addition to the Operating Agreement for the Company, each series under the umbrella typically has its own Separate Series Agreement, which can be agreed upon subsequent to the Company’s Operating Agreement. Each basket or series holds assets in its own name, (e.g., ABC Capital LLC, Series 1). Separate Series may be terminated at a different time than the Company by using a Separate Series Agreement. Some owners obtain separate EIN numbers for each series and open separate bank accounts for each series. The Certificate of Formation does not need to be amended as series are added.
Taxes
The Series LLC is taxed like a traditional LLC - either as a sole proprietorship for a one-member LLC or as a partnership for a multiple-member LLC. There is one tax payer ID number required for the entity, although some accountants request separate EINs for each cell. (Note: The IRS recently issued a Private Letter Ruling regarding a Delaware Series LLC. It permits series within a Series LLC to request separate tax ID numbers and file separate returns and even make separate tax elections. PLR 200803004.)
Multiple Parcels of Real Estate
For Real Estate investors with multiple properties, the Series LLC isolates each of the properties in separate cells. In states such as California, Texas and New York that require high fees to maintain separate companies, the Series LLC may be registered as a single foreign entity, saving on annual filing fees. The Delaware Series LLC needs to qualify only once as a foreign company doing business in the state where the property is located. We can order a Delaware Certificate of Good Standing for an additional $60. This may be required by the Secretary of State in your home state.
Creditors
The Delaware LLC Act empowers one or more members to build “fire-walls” between assets and liabilities within a single entity. One principle is to prevent a creditor of one cell (also known as a "series", "basket", "container" or "cell") within the LLC from collecting against other unrelated cells within the same LLC.
Adding Additional Series
The Series LLC members may add additional series within the LLC by simply signing a three page addendum to the Operating Agreement. While we set-up two series as part of the Incnow Series LLC package, additional series may be added at any time. This simple procedure, along with the requirement of maintaining separate books and records, makes the Series LLC an attractive alternative for the sophisticated investor or ambitious entrepreneur.
Multiple Product or Service Lines
Entrepreneurs and small businesses with different product or service lines can similarly incubate new products or services in separate cells. Properties and businesses may later be "spun-off" into separately filed LLC's. Cells may be terminated at any time with the consent of the members.
“Hot” and “Cold” Assets
Sometimes the Series LLC may be used to "group" businesses or properties. An individual may therefore have two or more separate Series LLC to protect "hot" (high-liability) assets, such as active businesses, from "cold" (low-liability) high-value assets such as real estate. Hot and cold assets should not be kept within the same Series LLC even if they are designated to separate cells.
Registered Agent and Annual Report
In Delaware the Series LLC only requires one registered agent and one annual report fee of $200 per year regardless of the number of series within a Series LLC.
Is a Series LLC Right for You?
The series LLC is mainly for people whose only alternative is a single traditional LLC. I always advise people to form separate entities as an alternative to a series and not to over-fund the series with more assets than they could tolerate all being subject to one judgment if a large judgment is rendered. Even with the disclaimers and warnings, the series LLC simply suits some people better. The Series LLC is not for everyone. More predictable asset segregation comes from multiple entity filings. At this time the Series LLC is best suited for those who have decided that the costs to file and maintain multiple entities are not justifiable.
Other Uses of the Series LLC
The Delaware Series LLC has been used in a variety of contexts outside series states, such as:
- Mutual funds avoiding the need to file more than one application with the SEC for separate classes of funds.
- Owning containers to be shipped overseas,
- An incubator for entrepreneurs with many business ideas (which may later be spun-off into separate LLCs if ideas start to take flight),
- To own trailer park lots,
- To franchise businesses,
- Incentive compensation for employees,
- To own intellectual property,
- To own a cluster of real estate investments (from developers to owners of worthless properties in New Orleans),
- For family gifting.
Additional Notes about the Delaware Series LLC
A party to a contract (not the Operating Agreement, but a contract with a third party) has the opportunity to limit the rights and remedies available to the other party at the outset. Using a Delaware Series LLC is one way to limit the other party's rights. For example, the contract could state:
"ABC Capital LLC, 5 Main Street Series, a Delaware Series LLC neither ABC Capital LLC as a whole, nor any other series therein, aside from 5 Main Street Series, are a party to this agreement. Under any and all circumstances, the other party's remedy, including equitable and money damages, for any and all breaches of this agreement shall not apply to the ABC Capital LLC nor any other series therein and shall not exceed the value of assets held by 5 Main Street Series alone. The other party knowingly and expressly waives any right to collect a future judgment on, or put a lien against, any assets other than those held by 5 Main Street Series alone." (It may also be prudent to limit the creditors to a charging order against the series alone, but that may be over-reaching).
The governing law and/or forum can also be stipulated:
"This agreement is to be governed by Delaware law in Delaware courts to the maximum extent allowed.”
[Click Here to Learn More about the Delaware Series LLC]
Incnow Series LLC Package
Our price for the Series LLC is $598, which includes the Operating Agreement.
[Click Here to order a Series LLC]
This $598 package is usually sent out within 5 business days and includes:
- Delaware filing fees and Certificate of Formation
- First year's Registered Agent service
- Priority mail postage
- The Series Operating Agreement that contains:
- A 37-page Company Agreement to establish and manage the umbrella organization
- Two separate Series Agreements (to establish the baskets underneath the umbrella in which all assets and activities take place; more series may be added anytime at the member's discretion without additional filings by drafting and signing an additional separate series agreement following our easy-to-use template)
- Separate Series Termination Agreement (for when you want to eliminate a series)
- Table of Contents
- Instructional cover letter on how to title contracts, title real estate, open bank accounts and obtain an EIN number
- The above signature-ready agreements in paper and electronic Microsoft Word format
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The International LLC
Frequently Asked Questions:
Q. Why use a Delaware LLC for overseas business or property?
A. Most International clients choose a Delaware LLC for:
- Tax advantages
- Privacy
- Low cost
- Prestige
Q. If my Delaware LLC does business in the United States, must it pay tax in the United States?
A. Yes. Any income substantially connected to the United States must be reported to the IRS.
Q. Must a Delaware LLC have a bank account and/or office in Delaware?
A. No.
Q. Can a Delaware LLC operate anywhere in the world?
A. A Delaware LLC can qualify to do business in foreign countries. Since many nations want to encourage economic ties with the United States, those nations typically permit a Delaware LLC to own property or run businesses internationally. Typically, foreign countries require the LLC to apply to do business. We can supply the LLC Good Standing Certificate or Apostille for the application.
Q. Why form a Delaware LLC and not a Delaware Corporation?
A. The Delaware LLC default tax status is: partnership (a pass-through tax status). The default tax status for a C-Corporation is "double taxation." Only U.S. citizens and permanent resident aliens are permitted to make the S-Corporation election to avoid "double taxation". Thus, choosing a Delaware LLC may reduce the U.S. tax burden.
Q. What other services do you offer to international clients?
A. Non-resident aliens may be interested in the following Incnow International Services:
- 5-Minute Complete Delaware LLC formation services ($298 including filing fees and agent service)
- Delaware Registered Agent service ($90/year, first year is free with order)
- Domestication of non-Unites States companies to Delaware (e.g. Channel Islands Corporation becomes a Delaware LLC). The laws of the formation's nation must also permit such re-domestication. Our fee does not include review or compliance with foreign law. ($620 includes agent fee, processing, Certificate of Formation, Certificate of Domestication, good standing, Certified Copy, International Fed Ex)
- DHL, or International Fed Ex package delivery ($75)
- Bank account referral & mail forwarding referral available upon request (free referrals with service)
- Apostille of good standing and/or certified copy of certificate of formation for Hague Convention signatory nations ($125), or legalization of good standing and/or certified copy of the certificate of formation with United States Department of State and foreign consulate in the United States for non-Hague Convention nations (fees and time vary, $550+)
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Circular 230 Tax Disclaimer:
In accordance with Circular 230, the content of this publication is not to be relied upon for the preparation of a tax return or to avoid penalties imposed by the IRS Tax Code.
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About Us
The Williams Law Firm, P.A. acts as general counsel for Agents and Corporations, Inc. The firm has an "A" rating from the Martindale Hubbell Law Directory. To decide on the type of company you should form and to get help with the technical details, call 800-759-2248.
Contact Us
If you have any questions on which entity or state to choose, then please contact us for immediate assistance.
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David Wiliams, Esq., John Williams, Esq., or any of our Incorporation Specialists |
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Agents and Corporations, Inc.
One Commerce Center
1201 Orange Street, Suite 600
PO Box 511
Wilmington, New Castle County, Delaware 19899-0511
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302-575-0877 |
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800-759-2248 |
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302-575-1642 |
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When sending us an e-mail, please provide us with your name, address, telephone number and fax number so that we can promptly respond to your request. Thank you.
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Vice President John L. Williams, Esq., is an attorney licensed in Delaware, New York, Massachusetts, New Jersey, and Pennsylvania.
