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DELAWARE LIMITED LIABILITY COMPANY
THE LLC CONCEPT
The Limited Liability Company (LLC) has
special features that distinguish it from ordinary companies. Like
a corporation, an LLC has a legal existence separate and distinct
from its owners. Like the shareholders and directors of an ordinary
company, the members and managers of an LLC are not personally liable
for the LLC's debts and obligations. The principal attractions of
the LLC for advisors and their clients are its operation and tax
treatment:
(1) Operationally the management of the LLC functions similarly
to a partnership and is governed by a written agreement among the
members of the LLC; this is different from the traditional corporate
governance of companies where management is outlined in the Articles
of Association (also known as Bylaws).
(2) A properly structured LLC will be treated by many tax regimes
as a pass-through entity with tax being paid by the members and
not at the LLC level.
THE DELAWARE LLC
Each of the 50 states of the United States is constitutionally
an independent legal jurisdiction with the right to enact laws in
many areas of activity. Each state has enacted its own LLC statute
with most states doing so after 1988 when the U.S. Internal Revenue
Service commenced issuing rulings that an LLC would qualify for
partnership tax treatment. Among the states, the state of Delaware
has emerged as the premiere LLC jurisdiction with approximately
25,000 LLCs being formed annually. The status of Delaware as the
leading LLC domicile is linked in part to the important role played
in the U.S. by the Delaware corporate legislation and its Chancery
Court in the development of American corporate jurisprudence. The
influence of the Delaware corporate regime is evidenced by the fact
that more than half of the companies on the Fortune 500 list and
of the companies listed on the New York Stock Exchange are domiciled
in Delaware.
An equally important factor for Delaware's popularity as a corporate
domicile is the pro-business role of the Government of Delaware
specifically the office of the Secretary of State which
is responsible for corporate formation.
FOREIGN OWNERSHIP OF LLCs
There are important tax and corporate governance advantages to
the ownership by non-U.S. persons of a Delaware LLC. These are:
(1) No restrictions on foreign ownership or management of the LLC.
Members may be individuals or business entities of any nationality
or domicile. Single member LLC's are permitted. . With the exception
of a Registered Office and Registered Agent in Delaware, no physical
presence is required.
(2) The LLC management agreement is not a matter of public record
and can be in any language.
(3) No disclosure in the public record of the names of the members
or managers of the LLC.
(4) Non-residents of the U.S. who are members of an LLC and who
are not otherwise subject to U.S. federal income taxation pay no
tax in the U.S. if the LLC's income is from non-U.S. sources and
the LLC carries on no business in the U.S.
(5) The LLC's corporate records may be maintained outside of the
U.S.
(6) The ownership interests in an LLC of an individual non-resident
of the U.S. are subject to the U.S. estate tax but can be avoided
if the ownership interest is held through a foreign company.
GOVERNMENT FILINGS
On formation the LLC files a Certificate of Formation with the
office of the Secretary of State which lists:
(1) The name of the LLC which name must contain the words šLimited
Liability Company〃 or the abbreviation šL.L.C.〃
or šLLC〃.
(2) The name and address in Delaware of the LLCˇs registered
agent and registered office.
The LLC is not required to make any reports to the State of Delaware
of its members, managers, directors or income.
If the LLC has more than one member it is required after establishment
to apply for a Federal Tax Identification Number and on an annual
basis to file an information return with the U.S. Internal Revenue
Service. Provided that there is no income earned from United States
sources that would be taxable by the U.S., the information return
will reflect that the LLC had no taxable income for the relevant
tax year. As part of our LLC management service we can apply for
the LLC's tax identification number and prepare and file the LLC's
annual information return.
If the LLC has only one member its existence as a separate entity
can be disregarded for U.S. federal income tax purposes. The single
member LLC is not required to apply for a Federal Tax Identification
Number nor file an annual information return.
CORPORATE GOVERNANCE
A unique feature of the LLC legislation is that it allows members
to define their business relationship in a written agreement which
governs the operation and management of the entity.
The policy of the drafters of the LLC legislation was to allow
members of the LLC the maximum freedom of contract in the commercial
context. As part of our LLC service we provide clients with a specimen
LLC operating agreement for their use.
The members of the LLC may choose whether they wish to manage the
entity or to appoint a member or a third party to be the manager.
There is no requirement that members themselves be the managers
of the LLC. A member acting as the manager or a third party acting
as the manager is not liable for any debts or liabilities of the
LLC solely by reason of that person being a member or acting as
a manager.
The typical LLC agreement will address the following issues:
. Identifying the party responsible for managing the LLC.
. Rights and duties of the manager and any limitations or restrictions
on such authority.
. The economic rights of members, including the making of contributions
to the LLC, the right to receive allocations of profits and losses,
and the timing of and restrictions on distributions by the LLC to
its members.
. Any special voting rights.
. Any classes or groups of members or managers with different rights,
powers and duties.
. The issuance and transfer of interests in the LLC, the admission
and withdrawal of members.
. Mandatory and non-mandatory purchase of interests in the LLC on
the occurrence of specified events such as death, disability, resignation
or expulsion of a member.
Where the operating agreement is silent on a management issue,
the provisions of the LLC statute will apply.
PARTNERSHIP TAX TREATMENT
Depending on the tax domicile of members it may be possible to
provide through a written agreement of members for allocations of
income and/or deductions of an LLC treated as a partnership among
members on amounts which differ from the membersˇ economic
interests in the LLC as well as the ability to provide a tax basis
to members for non-recourse debt. It also is permissible for the
members to elect for an LLC to be treated as a separate corporate
entity.
USES FOR LLCS
The LLC structure is particularly attractive as an alternative
to the use of general partnerships and limited partnerships as the
LLC provides all members with limited liability protection against
claims of creditors. This protection benefits entrepreneurs and
other start-ups.
The pass-through tax character of the LLC means that for a single
member LLC tax return preparation and reporting occurs only at the
member level with resulting cost savings and administrative efficiencies
for all businesses that can operate in an LLC structure.
Venture capital, real estate and other types of joint ventures
can take advantage of the ability to use the LLC operating agreement
to allocate profits and losses among participants in a manner which
reflects the business agreements they have reached.
The ability to limit the life of the LLC can also be used effectively
in joint ventures, start-ups and other projects with a transactional
purpose that is for a specified time period.
The LLC can be employed in the international context to achieve
tax efficiencies where the
income of an LLC is allocated among members from different tax regimes.
DELAWARE LLC FORMATION AND MAINTENANCE FEES
Establishment US$1025
Name availability search, name reservation, preparation and filing
of the Certificate of Formation (including all filing fees), preparation
of members register, issuance of membership interests, preparation
of LLC operating agreement, liaison with client.
Each LLC is provided with a filed copy of the Certificate of Formation,
standard LLC operating agreement, Form 8832 (Entity Classification
Election) and Form SS-4 (Application for Employee Identification
Number).
Our Delaware LLC service also includes the provision of a company
kit which contains member certificates, company seal, member transfer
ledger and a register of members.
Annual Maintenance US$525
Payment of annual filing fee, providing Registered Office and Registered
Agent services including forwarding of LLC Tax Notice.
See also:
Nevada LLC Formation
Nevada Corporation Formation
Delaware LLC Formation
Delaware Corporation Formation
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