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Limited Liability Company

A limited liability company, also referred to as an "LLC", is as it says; a means of carrying on an endeavor with limited liability to its principals.

The LLC is a hybrid business entity that combines many of the best features of corporations with those of partnerships. Like a corporation, an LLC is a separate legal entity distinct from its owners; thus removing the owners and managers from any personal liability for the company's debts or obligations. Unlike a traditional, or "C" corporation, an LLC passes its income or losses through to its members. This places the tax impact of the activities of the LLC upon the members and not on the LLC entity.

Two primary documents define the LLC. The LLC comes into existence when a Certificate of Formation is filed with the Delaware Secretary of State. The framework of the LLC is defined by the operating agreement also known as the Limited Liability Company Agreement. The day-to-day business of the Limited Liability Company is conducted by its Manager or Co-Managers and is governed by the operating agreement. This written agreement among owners allows the ability to create a customized management structure clearly outlining the economic relationship among the owners. Non-regular business of the Limited Liability Company, (borrowing money or making a major capital expenditure, for example) may, with proper authority set out in the LLC Agreement, (unlike the Corporation which requires meetings and minutes) be accomplished directly by the Manager(s).

The important fact to remember in operating the Limited Liability Company is to treat it as an entity separate from the members. If the members or managers act as if they are the Limited Liability Company, there exists the possibility that a court will set aside the liability protection and look to the members for individual liability.

The Limited Liability Company should have its own checking account, its own insurance policies and contract in its own name. In order to validate the existence of the Limited Liability Company, proper formalities must be observed such as signing and dating appropriate documents and following the formality of acting through the entity when conducting business.

An LLC requires some thought as to its organization, but if properly structured an LLC allows you the opportunity to have the limited liability typically associated with a corporation while at the same time enabling you to be treated as a partner for federal tax purposes.

The owners of an LLC are referred to as members. Members are obligated to the organization only to the extent of their contribution.

BENEFITS OF A DELAWARE LIMITED LIABILITY COMPANY

  1. No shareholder/member limit;
  2. No restrictions on classes of members;
  3. No general liability;
  4. Limited liability for members and managers. Limited liability of members and managers to third parties;
  5. Taxable as a partnership for federal tax purposes;
  6. Flexibility of management structure due to the fact that management is pursuant to the LLC agreement;
  7. A fixed annual State franchise tax without regard to size or number of members.

delaware business entity types