Designing and driving a Delaware LLC: With the right operating agreement it performs like a NASCAR champion vehicle

By John Williams | Published July 2, 2012

Business is a vehicular sport. When you set-up your LLC, you get to choose the make and model of the vehicle. Do you want a foreign or a domestic car? Do you go to the dealership closest to your house figuring you just need to get from Point A to to Point B? Or do you do your homework and research the best car for you within your budget?

Delaware is on the NASCAR circuit. It has a track in Dover, the state’s capital, people call the “monster mile.” If you want to win in Dover, or anywhere, you need to have a car that is designed well, maintained well and operated well. The same is true of an LLC. When you are starting your business, you get to pick-out your car. You can get a car like Jeff Gordon if you form a Delaware LLC. Should you create your company in your home state, then you are inevitably getting an inferior product, simply out of convenience. This is because in your home state the car may not perform as you expected at the time you need it most, when it is under maximum stress.

Picking the state is just the beginning of building your business. You also need to assemble the vehicle. Delaware laws ensure your car will perform as designed and provide you with maximum protection, but it does not have a default “model car.” In other words, the Delaware LLC is only as good as the agreement you use. If you use a standard agreement from a kit company, then you might as well be running Jeff Gordon’s car on bicycle wheels. What is needed is a well-designed operating agreement. This is the engineering of the car. Usually going to a Delaware lawyer would be the best way to get a custom car/operating agreement. However some people cannot afford the expense of an attorney when their business is just getting started, usually starting at $1,000 to craft a custom operating agreement.

Delaware has become the preferred state to use for the LLC especially for large commercial deals. This is because of the Delaware flexibility when designing the agreement (something known as “freedom of contract”) and predictability to make sure it performs in stressful situations, like lawsuits. When a driver turns the wheel on a NASCAR stock car going over 160 MPH, he expects it to respond as it was designed, as it was tested and as it has in the past. When people say the Delaware LLC is flexible, that is only at the outset when you are drafting the LLC operating agreement. Once that has been executed, it is rock solid. The Delaware LLC becomes a well-oiled machine that operates under laws of physics as it was engineered.

The flexibility of the Delaware LLC is only in the drafting and “design” stage. Other states may not be as flexible in letting you put together the LLC agreement the way you see fit. Instead many states have rigid rules about what you can and cannot say in the LLC agreement. Other states often do not “publicize” their limitations, so it will not be until later, when you are driving your car around a sharp turn that the car does not perform as it was designed. It is then that other states’ laws start to look flexible (in a bad way). That results in the wheel not going where it was designed to go and your car being more likely to land in the sidewall of the track.

American states have long been called the “Laboratories of Democracy.” This is because the scientific method requires a test group and a control group with a hypothesis at the beginning that is either proven true or false.

When it comes to this laboratory, it is not just the state legislatures which are part of the lab. It is also the court system. Although every state must operate within the confines of the United States Constitution and the supremacy of federal law, there is much that is untouched by Congress, as hard as that may be to believe. As a result, the state legislatures, operating within the confines of each State’s Constitution, has the power to enact laws to provide services and regulate everything else. The Delaware LLC has been refined because of careful thought from the legislature, with the assistance of top corporate lawyers. The Delaware court system also understands that they want Delaware to maintain this place of prominence and desirability so that the Delaware LLC stays on top of the leader board.

Therefore when Delaware’s specialized business court decides cases involving the Delaware LLC, they think about the implications not only for the parties before the court, but everyone else who has the Delaware LLC that expects it to act a certain way. This makes the entity very predictable, like a top-performing racecar.

You can form your Delaware LLC with and get an operating agreement that was originally crafted by top-industry-professionals who are Delaware attorneys. This is an agreement that was originally drafted for their professional clients. This gets you as close as you can to a car like Jeff Gordon so you too can count on your company to protect you most when it matters most. It may also be needed to protect your assets and your loved ones. Choose carefully.

When deciding where to form your company, consider that Delaware has advantages over your home state that may benefit you. Go