Why Form an LLC in Delaware: Everything You Need to Know
Entrepreneurs may wonder: Why form an LLC in Delaware? First, a limited liability company (LLC) offers a number of benefits and liability protections to the business owner and LLC members that would not be available under other business structures.3 min read
2. LLC Operating Agreements
3. Freedom of Contract
Entrepreneurs may wonder: Why form an LLC in Delaware? First, a limited liability company (LLC) offers a number of benefits and liability protections to the business owner and LLC members that would not be available under other business structures. Second, an LLC is the most flexible business structure available in Delaware.
Major Delaware LLC Advantages
It's important to understand the benefits of an LLC to determine if this is the right business structure for your company. Because of how flexible LLCs are, choosing to structure as business as a limited liability company has become an extremely popular choice among local business owners.
This type of business offers many benefits, depending on your exact business situation. An LLC might work especially well for the following people and businesses:
- Real estate companies
- Family-owned businesses
- Estate planners
- Owners of intellectual property
- Owners of potentially dangerous assets like vehicle fleets or apartment buildings
- Those who maintain government licenses or contracts
One major advantage to forming an LLC in Delaware is the ability to establish customized rules and structures. This is all set forth in a legal document known as the LLC's operating agreement, which is created by the company's members. In a nutshell, this means that the specific structure, rules, and terms of the company can be customized to meet the unique requirements of individual businesses.
This flexibility, known as "freedom of contract" is one of the biggest advantages forming an LLC offers compared to any other option in the state of Delaware.
Finally, LLCs in Delaware do not have to abide by a lot of formal requirements you'll find with other business structures, such as voting and holding an annual meeting. With this in mind, a well-structured operating agreement does not include bureaucratic requirements. The goal is to streamline operations and help the business run smoothly with as little red tape as possible.
LLC Operating Agreements
In the state of Delaware, an operating agreement can either be a written contract or a verbal agreement. Although companies are free to choose to establish their operating agreement in either way, the most common method is to establish an official, written contract between company members. This helps to avoid discrepancies in the event of future disagreements or legal action between members.
While every company's operating agreement will be different, they should all contain important items such as the following:
- The percent of ownership each member can claim
- Methods for distributing financial gains and losses, as well as business expenses
- The authority each member has and their expected participation in daily activities
- Voting rights available to members when important decisions need to be made
- Terms allowing members to leave the company under certain circumstances (if any)
- Established methods for calculating accrued economic interests if a member does leave the company
- How the death of a member will affect the company and how this will be addressed
- How and when new members are allowed to join the company
- How and when the company might be dissolved and liquidated
Freedom of Contract
You have the freedom to determine the structure of your business when forming an LLC in Delaware. Unlike other structures — such as a general corporation, which requires three tiers of power — you have complete control to decide how authority is allocated and distributed.
Most limited liability companies can be broken down into two categories:
This differentiation is made in your operating agreement, not in the documents you file with the state. Making a switch from one structure type to another is handled from within the company and requires 100-percent agreement among all current members, accompanied by an amendment to your company's agreement. As long as you have complete agreement between the LLC's members, this is a very easy thing to accomplish.
The freedom to establish any structure you desire is known as "freedom of contract" in the state of Delaware. Simply create a contract that every member can agree on, and you're all set. After creating your operating agreement, the next step is to make sure that every company member will abide by its contents and requirements. For practical reasons, most companies will wait to draft and implement an operating agreement as a final step, after the company has been officially formed.
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