We often get questions about LLC stockholders, bylaws, stock certificates, directors, minutes and sometimes a Limited Liability “Corporation”. In response, we state that Limited Liability Companies do not have stock or bylaws. In fact, LLCs have almost no features of corporations. LLCs are known in legal circles as “unincorporated entities” because they are creatures of contract, rather than corporations which are creatures of statute.
But what does it mean to be a “creature of contract”? Are not LLCs authorized by the Delaware LLC Act? Does that not make them statutory?
The general answer is that corporations have statutory formalities and hierarchies they must follow and cannot waive. Corporations have “default rules”, many of which cannot be changed.
In the Delaware LLC there is not a default rule to establish the LLC framework. Instead, the entire framework for an LLC can be established by its Operating Agreement. The Operating Agreement is the “contract” of which the LLC is a “creature”. After a general notice filing with the formation jurisdiction, called a Certificate of Formation in Delaware, the LLC private Operating Agreement takes over to set forth the ownership structure and management structure. It may provide for a broad purpose or a single purpose. It can give managers broad powers or narrow powers. It can provide for member liability or limit member liability for capital calls and other obligations.
The LLC does not have stock or stockholders. Instead, the Operating Agreement has membership interests, which are not usually certificated. It’s all about the rights set forth in the Operating Agreement.
Delaware allows for maximum flexibility of contract when entering into an Operating Agreement. In exceedingly rare situations, LLC members use this freedom to “opt into” the Delaware General Corporation Law and establish members to establish rights of corporate stockholders who vote for directors who appoint officers. That anomalous situation is far from the norm. Most Delaware LLCs have owners called members and operators called managers whose power and duties are set forth in the Operating Agreement. This structure is much less bureaucratic than the corporate formalities which makes LLCs more popular.