4 Important Things to Know About Delaware LLCs
Taylor Valentine, IncNow Incorporation Specialist
I recently attended an LLC seminar sponsored by the National Business Institute in Wilmington, DE. The seminar was titled “LLCs From Start to Finish.” As an incorporation specialist with IncNow it served as a chance to reinforce my knowledge on all-things-LLC and learn from presenters with different perspectives on Series LLCs, accounting issues, and particularly the Delaware LLC Act and ways it sometimes differs from The Uniform Limited Liability Company Act and laws of other states.
The seminar was enjoyable, and afterward I had reviewed the Certificate of Formation, the operating agreement, corporate tax elections, and how to maintain the business after formation. This allowed me to learn a new approach to LLCs and to implement innovative ways to help IncNow customers understand the sometimes-foreign concept of officially forming their businesses.
There were a few things discussed at the seminar that many people might not be aware of when they’re looking to form a Delaware LLC:
A Delaware LLC is protected from creditors that target a member
The charging order that allows creditors of a member to pursue their distributions, but not LLC assets or other member assets, applies uniquely to LLCs in Delaware. Creditors are not entitled to LLC property or an ownership stake in the LLC, while The Uniform LLC Act does not always provide the same protection to LLCs formed in states that adopted this Act.
Delaware has “home-like” rulings
While it is widely known Delaware is home to a business-friendly court system, the Delaware LLC Act has provisions in 16 other states, allowing for Delaware’s “home-like” rulings. While this does not extend to all states, having Delaware as your business’s home state may provide a legal benefit in another state.
Separating your personal and business assets is crucial
Emphasis is placed on ensuring company costs and expenses are handled with company funds, limiting the commingling between your role as a citizen and your role with the company. Even going so far as to avoid signing documents with just your name, but making sure you are signing as the member/manager. This protects liability and makes it less likely for a judgement creditor to “pierce the veil.”
MORE: What You Need to Know About the Series LLC
It’s difficult to “pierce the veil” in Delaware
In certain cases from outside of Delaware we have seen that the veil can be pierced, but specific criteria must be met. GreenHunter Energy, Inc. v. W. Ecosystems Tech., Inc. was a case in Wyoming in which GreenHunter Wind Energy sought consulting services from Western Ecosystems Technology, Inc. for a wind turbine farm. GreenHunter skipped out on the $43,000+ bill and was sued, laying the groundwork for an instance in which a veil was pierced. GreenHunter was the sole member and manager of the LLC, which never carried enough capital to cover a debt so high, and was ruled to owe the debt plus court fees. This case is one more reason to form a Delaware LLC and not a Wyoming LLC. The court determined that to pierce the veil in Wyoming, four factors must be considered: fraud, inadequate capitalization, failure to observe corporate formalities, and intermingling of financial affairs.
In the end, the seminar reinforced that Delaware makes it easy to maintain and operate an LLC while giving credence to businesses and putting faith in these companies to maintain a solid LLC operating agreement. With a strong operating agreement and a conscientious attention upholding the integrity of company matters, any business owner can take advantage of the advantages of a Delaware LLC.
