What Are the Benefits of a Delaware LLC?

By Joe Stone

Delaware enacted its LLC laws in 1992, called the Limited Liability Company Act, which authorized the formation of a new type of business entity that combines the most favorable aspects of a corporation and a partnership. The LLC owners, referred to as members, have the same limited liability as the shareholders of a corporation and receive the same income tax treatment as a partnership. Although all states have enacted LLC laws, forming an LLC under Delaware law has some unique benefits.

Delaware enacted its LLC laws in 1992, called the Limited Liability Company Act, which authorized the formation of a new type of business entity that combines the most favorable aspects of a corporation and a partnership. The LLC owners, referred to as members, have the same limited liability as the shareholders of a corporation and receive the same income tax treatment as a partnership. Although all states have enacted LLC laws, forming an LLC under Delaware law has some unique benefits.

Court of Chancery

The Delaware court system is unique among the states with its Court of Chancery, a specialized court for adjudicating business disputes. The Court of Chancery is well-known for its expertise in corporate law, which has been developed over 200 years, and under Delaware’s LLC law, the Court of Chancery’s jurisdiction includes LLC disputes. In fact, members of a Delaware LLC have the same right as shareholders of a corporation to file a derivative action in the Court of Chancery; that is, a lawsuit to enforce an LLC’s claim against another individual or company that is not being adequately pursued by the LLC’s managing members.

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Freedom of Contract

The state of Delaware has always enjoyed a reputation for having a favorable business climate for corporations, especially with regard to freedom of contract and enforcing the rights of the contracting parties. In 2010, the Delaware Legislature enacted an amendment to Delaware's LLC law to extend the same freedom of contract principles to LLCs. The amendment overturned the effect of a Delaware Supreme Court decision that found an LLC's oral operating agreement unenforceable because it did not comply with the statute of frauds; that is, the agreement could not be performed in one year. The amendment makes such operating agreements enforceable.

Confidentiality

Delaware LLC law also benefits those business owners who value confidentiality and privacy of information that can be made public through filing documents with the state. For example, upon creating an LLC, all states require filing a document, called articles of organization or certificate of formation, which will be available for public viewing. Unlike other states, the certificate of formation required to create a Delaware LLC does not need to include the names and addresses of the LLC's members or managers.

Series LLC

A specialized form of LLC, called a series LLC, is available in only eight states, one of which is Delaware -- the first state to amend its LLC laws to provide for a series LLC. The benefit of a series LLC is its ability to create separate series or cells in order to segregate its assets to prevent the profitability of one asset from incurring the liabilities of an under-performing asset. Such an LLC is especially suited for owning multiple rental properties so that each property can be segregated into different series within the LLC.

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Delaware LLC Advantages

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LLC Statutes in Illinois

In 1997, the Illinois Limited Liability Company Act was enacted and established the governing LLC statutes in Illinois, cited as 85 Illinois Compiled Statutes (ILCS) 180. The act authorized the formation of LLCs as new business structures that are designed to give business owners the advantages of a corporation -- limited liability -- and a partnership -- flexibility in management and pass-through taxation. In August 2005, the act was amended to authorize a new type of LLC called a "series LLC" and amended again in 2010 to provide for a new type of LLC called a "low-profit LLC.”

Nebraska Limited Liability Company Act

The Nebraska Uniform Limited Liability Company Act -- Nebraska Revised Statutes Chapter 21, Sections 21-101 to 21-197 -- sets forth the law regarding the formation and operation of limited liability companies in Nebraska. The act was passed and signed into law in 2010. It is effective as of January 2011, and constitutes a complete revision of Nebraska's limited liability company law.

How to Convert LLC to Series LLC

The Series LLC is a new form of limited liability company that has been authorized by nine states as of 2012. If your business was formed as an ordinary LLC in one of these states, it is possible to convert it to a Series LLC. Although you can prepare and file your own conversion documents, you can also use an online legal documentation service to prepare and file these documents for you.

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