What is a Delaware LLC?
A Delaware limited liability company (LLC) is a legal structure usually created for the purpose of running a business or owning assets. It is established and governed by state law in Delaware.
LLC’s combine features of both corporations as well as partnerships. This blend offers a mix of flexible management and ownership, with less restrictions. Unlike traditional corporations, annual formal meetings are not required. Although the Delaware LLC Act is relatively young, with the first Delaware LLC formed in 1992, they have by far become the most common type of business in Delaware with over 70% of new companies in the state being formed as an LLC.
Of the 20,000 Delaware LLC’s formed every month only about 1% are for people who live in Delaware, you can set up a Delaware LLC even if you live in another state or if you live abroad.
Interested in forming a Delaware LLC? We’ll prepare and file your LLC.
Most Delaware LLCs are formed without any of the LLC members ever visiting Delaware. All Delaware entities (including LLCs) must maintain a Registered Agent, such as Agents and Corporations, Inc. (IncNow), to serve as the physical presence in the state on your company’s behalf. This is the jurisdictional foothold for legal notice purposes. The registered agent is an office open to receive and forward legal notices to the communications contact on file for the company. (Learn more about Delaware Registered Agents.)
Delaware LLC Structure
The Delaware LLC starts with the filing of a Certificate of Formation. All of the ownership and management are primarily controlled by a private internal Operating Agreement.
The Operating Agreement is an internal company agreement signed by the owners (also known as members) of the LLC that lays out the rights and duties of each member of the LLC, as well as the structure of the company and how to allocate profits and losses. An LLC Agreement is required in Delaware and although a verbal or unsigned agreement is legal, documenting it in a formal signed contract is the only way to make it practical. IncNow provides a professionally-prepared Operating Agreement as part of our Complete LLC and Now LLC packages.
Delaware LLC members have the flexibility to structure their Operating Agreement to fit the needs of their business. The LLC has very few statutory requirements compared to a Delaware corporation since Delaware does not require members to hold an annual meeting or file an annual report. With an LLC, there is much less paperwork in general.
A Delaware LLC exists as a separate legal entity from its members, creating a shield that insulates the owners from individual liability beyond their investment for the LLC’s financial obligations. Unlike a corporation, the protection in a LLC also runs in reverse. This shield also protects the Delaware LLC itself from future judgments against individual members due to the state’s exclusive “charging order” remedy. This means that a creditor who obtains a judgment against a member of the Delaware LLC can only receive that member’s distributions from the LLC and not a voting interest, nor can the creditor of a member order the liquidation of the LLC.
Members of a Delaware LLC are afforded arguably greater limited liability protection than shareholders in a corporation.
Can an LLC have One Member?
Single-Member Delaware LLC
Simply put, a single member LLC is a limited liability company with only one owner.
By default, a single member LLC is considered a “disregarded entity” for tax purposes. This means that the business itself doesn’t file a tax return, but rather the income and expense of the company is linked on Schedule C to the owner’s own individual form 1040 tax return. Likewise, when the single owner is another business entity, the income and expenses of the LLC subsidiary get “upstreamed” to its parent company without a separate tax return required for the subsidiary. Even though a single member Delaware LLC is disregarded for tax purposes, it still is “regarded” for purposes of liability protection to shield the owner from liabilities of the subsidiary. One principle advantage of starting a single member LLC in the state of Delaware is reducing the risk of alter-ego liability. This is where a creditor pierces the veil of the protective LLC layer.
Ownership is not restricted to one member. Members can be added to a single-member Delaware LLC at a later date. We recommend this most for single-owner businesses because of the protection and flexibility. It is also possible to provide profit sharing to employees and others by contract without being a member. Being the owner gives you maximum control.
Multi-Member Delaware LLC
There is no upper limit on how many people can be owners of a Delaware LLC. These ownership interests can be divided into voting and nonvoting which is desirable both for family gifting and separating the money guys from the operations guys. Not only do Delaware LLC’s offer lots of flexibility in freedom of contract when creating operating agreements, Delaware also has the unique advantage of highly sophisticated business courts that uphold the terms of Operating Agreements exactly as they were written by the members. This provides a high level of legal safety and predictability.
Delaware courts interpret within the four corners of the Operating Agreement to treat the members as adults and make the members “sleep in the bed they created for themselves”. This also works to protect members who carefully negotiate their LLC Operating Agreements in advance. The most common attacks on LLCs come from within; your other business partners. This Operating Agreement is a pre-nuptial to address disputes later in time when partners go their own way.
How Are Delaware LLCs Managed?
The Delaware LLC does not need to elect to be either managed by its owners or an outsider, unlike most other states which require you elect one or the other. Usually in Delaware the members by majority retain management rights, even if they select an outsider to be the manager. This is, once again, flexibility built into a Delaware LLC.
Manager-Managed Delaware LLC
Within the Operating Agreement, the members can specify one or more outsiders to manage the LLC. A manager-managed Delaware LLC is an LLC that is operated by a non-member company officer. The duties and limitations of the manager are typically spelled out in the LLC Operating Agreement.
Member-Managed Delaware LLC
The Delaware LLC’s operating agreement can select one or more of the owners to be in control of the day-to-day affairs of the business. When an LLC is run and managed directly by its owners, it is known as a member-managed LLC. An operating agreement should also be created to explicitly delegate certain powers and duties to managers or officers. This is to make clear what powers and duties are retained by members, such as the power to replace the manager or approve large asset sales and financings.
Delaware Series LLC
A Delaware LLC has the ability under the Delaware LLC Act to create separate protected divisions, known as “series,” within the LLC. If your LLC wants this Series LLC option, its Certificate of Formation must make reference to the Delaware Code Sec. 6 Del. C. § 215, which authorizes the creation of series. Those individual series can enter into contracts, hold titles to assets, grant liens, open bank accounts, and even have different members. Learn more about the Delaware Series LLC.
The Delaware LLC Certificate of Formation
To form a Delaware LLC, a document named the Certificate of Formation must be submitted the Delaware Secretary of State’s Division of Corporations. This filing then becomes public record and functions as the company’s official “birth certificate.” IncNow can complete the filing on your behalf and sign as Authorized Person for the LLC. Many other states refer to this as the Articles of Organization or Articles of Formation. IncNow can help you with this filing process and serve as the registered agent for the LLC.
The Certificate of Formation must include:
- The name of the LLC
- The name and address of the Registered Agent
- The signature of an authorized person, also known as an organizer (typically someone from our office)
The Certificate of Formation for a Delaware LLC does not usually contain the following:
- Members’ names
- Members’ addresses
Why use IncNow to Form a Delaware LLC?
IncNow is a family-owned and operated Registered Agent that has been providing reliable incorporation services to business owners around the world since 1974. We are attorney-operated and have friendly and knowledgeable Incorporation Specialists that are eager to help you form your Delaware LLC today. The process is easy – get started now!