6 Limited Liability Companies 6 Limited Liability Companies
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Akin to the corporation is a Limited Liability Company, which is a type of business structure that combines elements of both a corporation and a partnership. It is designed to provide the owners, known as members, with limited liability protection while offering flexibility in terms of management and taxation.
In an LLC, the owners have limited personal liability for the company's debts and obligations. This means that the member’s personal assets are generally protected from the company's liabilities. In the event of legal claims or financial issues, the members' liability is typically limited to the amount of their investment in the company.
One of the key advantages of an LLC is its flexibility in terms of management and operations. The members can choose to manage the company themselves, forming a member-managed LLC, or they can appoint one or more managers to handle the day-to-day operations, creating a manager-managed LLC. This allows for the efficient delegation of responsibilities and decision-making authority.
Regarding taxation, an LLC is generally treated as a pass-through entity. This means that the company itself does not pay taxes on its income. Instead, the profits and losses of the LLC "pass through" to the individual members, who report them on their personal tax returns. This avoids the double taxation issue that can occur with certain corporate structures.
6.1 How is an LLC Formed? 6.1 How is an LLC Formed?
So now we know what an LLC is and why it might be beneficial to use. But how do we form one? The formation process for an LLC mirrors that of a corporation. Additionally, the process of forming an LLC under the MBCA versus the DGCL are likewise incredibly similar and again are both illustrated here.
The MBCA Process The MBCA Process
Updated 10/15/2023
Step 1: Draft the Articles of Organization: Prepare the articles of organization, which typically include the LLC's name, purpose, registered agent's name and address, management structure (member-managed or manager-managed) and other relevant information.
Step 2: File the Articles of Organization: File the articles of organization with the appropriate state agency (usually the Secretary of State) and pay the required filing fee.
Step 3: Operating Agreement: Operating agreements are the LLC equivalent to the corporate bylaws. Although not always required, it is highly recommended to create an operating agreement. This document outlines the internal operating procedures, management structure, profit distribution and rights and responsibilities of LLC members. It helps establish clear guidelines and protects the interests of the members.
6.1.1 The DGCL Process 6.1.1 The DGCL Process
Step 1: Draft the Certificate of Formation: Draft the Certificate of Formation, which includes the LLC's name, purpose, registered agent's name and address, management structure (member-managed or manager-managed) and other required information.
Step 2: File the Certificate of Formation: File the completed Certificate of Formation with the Delaware Division of Corporations and pay the required filing fee.
Step 3: Obtain a Registered Agent: Designate a registered agent who will act as the LLC's official point of contact for legal and administrative matters in Delaware. The registered agent must have a physical address in Delaware and be available during regular business hours.
Step 4: Operating Agreement: Operating agreements are the LLC equivalent of corporate bylaws. Although not required by Delaware law, it is highly recommended to create an operating agreement. This document outlines the internal operating procedures, management structure, profit distribution and rights and responsibilities of LLC members. It helps establish clear guidelines and protects the interests of the members.