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.
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.
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.
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.
Read More: How to Convert LLC to Series LLC
- Delaware State Courts: Court of Chancery
- Delaware Code: Chapter 18. Limited Liability Company Act -- Subchapter X. Derivative Actions
- Morris James LLP: New Legislation Removes LLC Agreements from the Statute of Frauds
- Delaware: Division of Corporations - Certificate of Formation
- Illinois Secretary of State: Articles of Organization - Form LLC-5.5
- Delaware Code: § 18-215. Series of members, managers, limited liability company interests or assets.