Unlike a Delaware corporation, a Delaware limited liability company (“LLC”), is characterized by the following “built in” attributes often not found in the documents, older rules and stricter formalities that apply to corporations. Of utmost importance to the Delaware LLC’s desirability is the freedom of contract for its members in arranging the organizational structure of ownership and management.
Secondly, Delaware LLC members have protection from creditors of the business, but unlike a corporation, have additional protection from another category of creditors, the creditors of its owners. The protections of a Delaware LLC also extend to future creditors of other members of the LLC who might be potentially hostile to the company. This charging order protection helps to prevent those personal creditors from taking over and liquidating the business.
Delaware LLCs offer the business’s managers and owners freedom to draft the LLC operating agreement however they want. This flexibility allows Delaware LLCs to organize themselves however they think would be best for their particular situation. For example the Delaware LLC’s operating agreement often outlines dispute resolution mechanisms before disputes arise between owners. Another example of a helpful provision often found in Delaware LLC operating agreements is a right of first refusal to prevent a member from selling his/her membership interest to enemies of the remaining members without first offering the membership interest for sale to the other LLC members. A third example is that the Delaware LLC has the ability to limit or eliminate fiduciary duties to help insulate management and controlling members from liability from other insiders who may complain later about the conduct of the management.
On the other hand, corporations lack the flexibility of LLCs. While corporations do also offer their owners liability protection, there are more statutory requirements for a corporation including formal meetings. Inflexible corporate rules make administrative operations burdensome. This is, in part, because of the “middle management” layer required between owners and operators, called a board of directors. The Board of Directors is required to have annual meetings to decide major company decisions. Stockholders are also required to have annual meetings. Most LLC operating agreements do not require meetings. Other rigid corporate laws, such as fiduciary duty default rules cannot be waived or changed in corporate bylaws or other agreements. Most corporations do not have stockholder agreements. Only bylaws are required. Stockholder agreements are the best way to add in rights of first refusal enforceable against a stockholder to add more LLC-like provisions into a corporation framework. Few corporations enter into a stockholder agreement to provide protections from shares being sold to your worst enemy. Without a stockholder agreement, you lose control over future owners of your company.
A Delaware LLC is preferable due to greater two-way liability protection and added organizational flexibility, where a corporation only has a one-way shield and rigid rules you must follow. Therefore, from the operational perspective, the Delaware LLC is far superior to a corporation.