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What is a Delaware LLC?

The Delaware limited liability company (“LLC”) is a type of business entity created and regulated under the Delaware LLC Act.

The LLC is a hybrid between a corporation and a partnership that allows for management and ownership to be structured in a manner to cut through bureaucracy. It provides liability protection to its owners. No formal meetings are required. It has many tax advantages. It is great for running businesses or owning assets. The first Delaware LLC was formed in 1992, however, it is now the most popular business entity formed or incorporated in Delaware. According to the Delaware Division of Corporations, more than 70 percent of new businesses formed in the state of Delaware in 2014 were LLCs.

You can form a Delaware LLC no matter where your business activities take place, or where you live in the United States. Most countries allow individuals to use a Delaware LLC as well.

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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 and NOW 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

As its name implies, a single-member LLC is an LLC with one member. For tax purposes, it can be treated as a corporation (by filing IRS Form 8832 and electing to be classified as a C-corporation, or classified as an S-corporation by filing IRS Form 2553 and electing subchapter S). The default classification is as a “disregarded entity” not requiring its own tax return, but instead including the profits or losses on the single member’s tax return.

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

The number of members is not limited in a Delaware LLC. A multi-member LLC can be taxed as a partnership, C-corporation, or S-corporation. Although the flexibility is great, what really sets Delaware apart is that the courts will enforce the Operating Agreement as the parties have written it.

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.

Management

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

Within the Operating Agreement, the LLC can also specify one or more members to run the affairs of the business. A Delaware LLC that is managed by one or more of its members is known as a member-managed LLC. The rights, responsibilities, and limitations of each member should be defined in the LLC Operating Agreement. The Operating Agreement can even create different classes of members, such as voting and non-voting.

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 start a Delaware LLC, a Certificate of Formation is filed with the Secretary of State’s Division of Corporations. This is the public record that charters the Delaware LLC and serves as the “birth certificate” of the company. 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.

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-run 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!