How Do LLCs Work?
What is an LLC? LLCs, short for Limited Liability Company, are a type of legal structure that have become increasing popular because of the legal protection is can provide its owners. In this article, we go into detail on what an LLC is, how it works, and the explain why Delaware is the best State for forming an LLC.
What is an LLC, Exactly?
An LLC (Limited Liability Company) is a business structure that protects its owners (known as members) from personal liability for business debts, shielding personal assets like homes and savings. A Delaware LLC offers flexibility and privacy when structuring the ownership and management. LLC Members have much freedom of contract to customize the governing operating agreement. It also avoids many strict formalities of the corporation structure. LLCs combine corporate liability protection with partnership-style flexibility with regard to management.
Is An LLC a Corporation?
An LLC is sometimes referred to as an “unincorporated” entity. It is very different from a rigid corporate structure.
How Does an LLC Work?
After you choose a name and registered agent for your new LLC, you direct a certificate to be filed in the state of formation and the secretary of state approves it and adds your company to their registry, a database of all companies. Then, you enter into an Operating Agreement to document who are the owners and managers. Once you have an EIN from the IRS, you open a bank account in the name of the LLC. After this, you can enter into contracts in the name of the LLC with you as manager. You can also title assets in the name of the LLC, such as houses, land, vehicles, and airplanes. It is important to keep LLC financial records and assets separate from your personal assets and expenses. An LLC works by creating this legal separation (also known as a veil or shield) between a human owner and their artificial entity (LLC), protecting personal assets from business debts and lawsuits.
What are Fiduciary Duties for Members and Managers?
In a Delaware LLC, the Managers and Majority Members have default fiduciary duties. If not waived, expanded, or restricted, the LLC fiduciary duties are very similar to that of a corporation’s officers and directors. These consist of a duty of care (to make informed decisions) and a duty of loyalty (not to self-deal in a way that is not fair). Additionally, LLC Managers and majority owners must follow the implied covenant of good faith and fair dealing, which is not waivable and is used as a gap-filler to address terms not stated in the LLC Agreement that would have been obvious what they would be to everyone had they been written out.
What Does it Mean to Form an LLC?
The LLC is formed by submitting a one-page document to the secretary of state of the state of formation. Once that document has been reviewed by staff in the Division of Corporations to meet minimum statutory requirements and the filing fee has been paid. Then, the LLC name is added to a public registry with the formation document included for anyone to see.
This is the birth certificate of the LLC, a separate legal business entity that protects its owners (members) from having personal liability for business debts. It shields personal assets like homes and savings. For “due formation” the Delaware LLC must also have an Operating Agreement that is oral, written, or implied. Of course it is advisable to have a written and signed Operating Agreement. That is a private contract just between the one-or-more owners of an LLC.
Which State is Best for LLCs?
The “best” state for LLCs is generally thought to be Delaware. Delaware has the best asset protection while being viewed as credible with access to the best business court system, the best secretary of state, and the best legislature body in the world. Delaware is the best for flexibility, privacy, and asset protection. Nevada is sometimes popular because of their statute that allows an LLC to do everything except fraud, but Nevada has a reputation problem and mediocre courts. Delaware prides itself on flexible laws, expertise of the Court of Chancery for business disputes, no income tax for out-of-state activity, and no annual report. Delaware is particularly outstanding for companies planning to grow, seek venture capital, or anticipate complex legal needs. These are some of the benefits that attract millions of business owners from across the globe to Delaware.
Florida, another contender for attracting LLC owners, offers a business-friendly environment with no income tax and a lower initial filing fee. Florida tends to be used only by businesses located in Florida. Also single-member LLCs in Florida have little asset protection compared to most other states. Only multi-member LLCs should be formed in Florida to avoid the “Olmstead” exception in the law that allows creditors to pierce the veil of single member LLCs.
