Limited Liability Company (LLC) is a way of structuring a business that provides limited liability to its members (owners) like a corporation, but also the structural and tax flexibility of a partnership. The limited liability aspect of the LLC protects the personal assets of its members from creditors and lawsuits that may come from the business. The incorporators can also choose whether the business should be taxed as a corporation or as a pass-through entity such as a partnership.
An LLC can only be formed under state law. As a result, the requirements and protections for LLCs can vary widely from state to state. While there is a lot of flexibility in creating and structuring LLCs in Delaware, there are a few mandatory requirements:
- Choose a name for the LLC. This name must be different from all other business names on record at the Delaware Department of Corporations and must include the label “limited liability company,” “LLC,” or “L.L.C.”
- Obtain a registered agent. Delaware requires that every business entity have a registered agent to make sure that any important information or any legal issues will make it to the LLC. The registered agent can be any individual or business with a physical address in Delaware (including the LLC itself).
- Certificate of Formation. The Secretary of State provides PDF fillable Certificates of Formation for creating all types of business entities. This document requires the name of the LLC and information on the registered agent.
The forms required to form your business as a LLC can be found at the Secretary of State website. The Certificate of Formation along with a processing fee can be mailed or faxed to the Delaware Secretary of State.
There are several reasons why you might want to structure your business as a LLC:
- Limited Liability: Like a corporation, LLCs shields the personal assets of its members from the debts and legal liability of the company.
- Tax Flexibility: LLCs can choose either to be taxed as a pass-through entity or as a corporation. Most LLCs choose to be taxed as a pass-through entity to avoid the double tax associated with corporations. If the LLC chooses to be taxed as a pass-through entity, then company revenues are only taxed when received by the LLC’s members and taxed according to their personal income bracket.
- Organizational Flexibility: Through writing an Operational Agreement, LLC’s can choose whether they will be run by members (owners) or other managers and provides the LLC flexibility to operate as needed.
- Money Distributed by Agreement Not Ownership: Members of the LLC can choose any desired method for distributing profits and are not bound by traditional partnership agreements. The only limitation is that it must be included in the Operational Agreement.
- No Required Annual Report: Unlike corporations in Delaware, LLCs do not have to file or pay fees for an annual report
While the limited liability and the tax flexibility of an LLC can be appealing, there are a few disadvantages to structuring your business as an LLC:
- Filing and Fees: Unlike a general partnership or sole proprietorship; LLCs require filing formation forms and payment of some administrative fees which can cost upwards of $100 and may require a lawyer.
- Additional Taxes: All LLCs, limited partnerships, and general partnerships are subject to an additional yearly tax of $350.
If you are looking for an attorney to help you with structuring your business, then contact a Local Delaware business lawyer today to get the help you need.