Delaware LLC Formation Guide

LLCs, or limited liability companies, are the most popular business structure in Delaware. Delaware LLCs offer more liability protection than corporations with a flexible tax structure.

When forming or updating a Delaware LLC, it is crucial to consider state-law considerations. Because the laws of each state are different, the LLC’s formation documents—especially the Delaware limited liability company agreement—must be prepared to meet Delaware’s specific requirements. This article discusses how to form Delaware LLCs that meet the requirements of Delaware law.

How are LLCs formed in Delaware?

A Delaware LLC begins its existence when it files a certificate of formation with the Delaware Department of State. The certificate of formation is a simple, short form that includes the minimum amount of information needed to notify the Delaware Department of State of the LLC’s existence. It does very little to structure the LLC to accomplish the owners’ objectives.

What is a Delaware limited liability company agreement?

A Delaware limited liability company agreement is a legal document that serves as a blueprint for LLC operations, including control of the LLC, distribution of profits, and the rights and duties of LLC members and managers.¹

A Delaware limited liability company agreement is the most important LLC formation document. It provides the framework for how the LLC will be governed. Without a valid limited liability company agreement, LLC owners are left to the default provisions of the Delaware Limited Liability Company Act to govern the most crucial LLC planning opportunities. A well-drafted limited liability company agreement should:

• Specify who controls the LLC and how the LLC may act. Different states have different default laws governing control of the LLC. To avoid relying on these fallback provisions, the limited liability company agreement should specify the management structure and be clear about what is necessary to constitute an action by the LLC. The management structure should also be designed with creditor protection in mind. When structured properly, a manager-managed structure can provide enhanced creditor protection.
• Provide clear rules for profit distribution. Different states have different laws regarding how profits and losses are allocated among the members of an LLC. These laws may not match the member’s intent. The limited liability company agreement should specify the member’s economic rights. Depending on how the LLC is structured, tax distribution provisions may be necessary to deal with the phantom income problem.
• Maximize liability protection. The limited liability company agreement should be designed to provide maximum protection to both the LLC itself and each member (both inside and outside liability). This requires strategic thinking to ensure that the limited liability company agreement reflects the LLC’s substantive business arrangement while simultaneously making the LLC unappealing to a creditor if a dispute arises. Care should also be given to adequate LLC documentation—including an organizational action without a meeting as discussed below–to prevent veil piercing claims.
• Define differences in voting rights for different classes of equity. If the LLC will have classes of equity that differ in either economic or voting rights, these classes should be created and clearly defined in the limited liability company agreement.
• Protect against unintended spousal ownership. The family law of some states can give a spouse an interest in an LLC by operation of law. This may be unacceptable to other LLC members who don’t want to be surprised to find themselves in business with their business partner’s spouse. The limited liability company agreement should include provisions and waivers to deal with unintended spousal ownership of the LLC.
• Clarify fiduciary duties. States have different approaches to fiduciary duties. Many rely on a patchwork of case law and statutes with lots of gray areas. The limited liability company agreement should include customized fiduciary duty provisions that match the owners’ specific intent.
• Take advantage of tax flexibility. Of all types of business entities, LLCs offer the most flexible tax structure. The limited liability company agreement should specify a tax-efficient tax classification to optimize tax-planning opportunities.

What is the Delaware Limited Liability Company Act?

In Delaware, Title 6, Subtitle II, Delaware Code governs business entities in general.² Delaware LLCs are governed by the Limited Liability Company Act.³

How does the Delaware Limited Liability Company Act relate to the limited liability company agreement?

As stated above, the limited liability company agreement is the most important LLC formation document for structuring a Delaware LLC. The Delaware Limited Liability Company Act assumes that the LLC will have a valid limited liability company agreement to govern its business operations.

Most provisions of the Delaware Limited Liability Company Act are simply default provisions that serve as a fallback for LLCs that fail to plan properly. These default provisions are the Delaware legislature’s best guess about what the owners might want. These guesses rarely align with the owners’ specific goals in setting up the LLC.

Does the Delaware Limited Liability Company Act limit what the members can agree to in the limited liability company agreement?

Unlike the law of some states, Delaware law provides broad freedom of contract and does not impose significant limits on the member’s freedom of contract in the operating agreement.

How much does it cost to form a Delaware LLC?

The cost to form a new Delaware LLC depends on three factors:

• Document preparation fees. Proper LLC formation requires preparation of a Delaware limited liability company agreement that is tailored to the goals of the LLC owners, as well as an organizational resolution and related documents needed to structure the LLC. Although the certificate of formation is a simple form that can be filled out online, the remaining documents—including the limited liability company agreement and organizational resolution—involve legal considerations that require knowledge of the intricacies of Delaware LLC law.
• Filing fees. Each new Delaware LLC formation requires filing fees. The fee to file the certificate of formation with the Delaware Department of State is $90.
• Registered Agent cost. As stated below, each Delaware LLC must appoint a registered agent to receive legal documents on the LLC’s behalf. Although nothing prevents a Delaware resident from serving as registered agent, many LLC owners prefer to use a registered agent for professionalism and to prevent junk mail. Delaware registered agent fees are usually $100.00 to $200.00 a year.

What are the filing procedures for Delaware LLCs?

A Delaware LLC is officially formed when the LLC’s certificate of formation is filed with the Delaware Department of State.⁴ The Certificate of Formation (and any other certificate filed with the Secretary of State) must be executed by one or more authorized persons. Unless otherwise provided in a limited liability company agreement, any person may sign any certificate or amendment thereof or enter into a limited liability company agreement or amendment thereof by an agent, including an attorney-in-fact.

Delaware law allows the certificate of formation to be signed electronically (e-signed). Instead of mailing or hand-delivering a hard copy, the organizer may submit the certificate of formation electronically for e-filing. There is no publication requirement.

What ongoing reporting requirements apply to Delaware LLCs?

Unlike many states, Delaware law does not require periodic filings with the Delaware Department of State to maintain the LLC.

Does Delaware law recognize series LLCs?

Delaware law allows Delaware LLCs to be organized as series LLCs.⁵

What is a member of a Delaware LLC?

An owner of a Delaware LLC is called a member.⁶

Who makes decisions on behalf of a Delaware LLC?

A Delaware LLC may be governed by the members (member-managed), or LLC managers may be appointed to govern the day-to-day affairs of the LLC.⁷

How may LLC members and managers act on behalf of the LLC?

Delaware LLC members and managers may act by formal meeting and vote, but that is relatively uncommon. In most cases, members and managers will sign a action without a meeting agreeing to actions on behalf of the LLC.⁸

What is a Delaware registered agent?

A Delaware registered agent is a Delaware resident or business organization that is designated to receive legal notices from the Delaware Department of State on behalf of the LLC. Each Delaware LLC must appoint a registered agent to receive service of process on the LLC. The registered agent need not sign a document accepting the appointment, but should be notified and engaged before the organizer files the certificate of formation.

What is a membership interest under the Delaware Limited Liability Company Act?

In Delaware, a member’s economic interest in an LLC is called a membership interest. The Delaware Limited Liability Company Act recognizes both economic interest and non-economic interests in an LLC. It refers to an economic interest as limited liability company interest.⁹ It does not specifically define a non-economic interest.

What fiduciary duties apply to Delaware LLC members and managers?

Fiduciary duties are an important—but often overlooked—aspect of LLC law. A fiduciary duty is a responsibility to act on behalf of another person and, where necessary, to put the other person’s interest ahead of one’s own.

It is not uncommon for LLC members and managers to be involved in different activities, some of which could be viewed as adverse to the interest of the LLC or other members or managers. Failure to consider fiduciary duties in the limited liability company agreement can create unexpected liability for breach of fiduciary duty claims.

The Delaware Limited Liability Company Act imposes fiduciary duties on each member or manager, depending on whether the LLC is member-managed or manager-managed. Delaware law was amended in 2013 to provide that, unless the operating agreement says otherwise, the managers and controlling members of Delaware LLCs owe fiduciary duties of care and loyalty to the LLC and its members.¹⁰ The scope of the fiduciary duties are not clearly specified in the Delaware Limited Liability Company Act.

Given that the Delaware Limited Liability Company Act does not specifically define the duties of loyalty and care, it is important for the operating agreement to either disclaim or define the fiduciary duties that apply to the LLC.

Duty of Care

Under Delaware law, each person with managerial authority (each member of a member-managed LLC and each manager of a manager-managed LLC) must act with the same care required of directors, officers, and controlling stockholders of Delaware corporations.¹¹ Fiduciary duty provisions in the limited liability company agreement should take the following into account:

• Uncabined duty of care. The duty of care is not limited to the duty of care defined in the Delaware Limited Liability Company Act. This means that, in interpreting the duty of care, courts may consider judicially developed fiduciary duties in a given dispute.
• Elimination of the duty of care. The Delaware Limited Liability Company Act allows the limited liability company agreement to completely eliminate the duty of care.
• Modification of the duty of care. The Delaware Limited Liability Company Act allows the limited liability company agreement to modify the duty of care.

Duty of Loyalty

Under Delaware law, each person with managerial authority (each member of a member-managed LLC and each manager of a manager-managed LLC) has a duty of loyalty to exercise the same duty of loyalty that applies to directors, officers, and controlling stockholders of Delaware corporations.¹² Fiduciary duty provisions in the limited liability company agreement should take the following into account:

• Uncabined duty of loyalty. The duty of loyalty is not limited to the duty of loyalty defined in the Delaware Limited Liability Company Act. When litigating a breach of the duty of loyalty, courts may consider fiduciary duties of loyalty that are derived from other sources, such as Delaware case law.
• Elimination of the duty of loyalty. The Delaware Limited Liability Company Act allows the limited liability company agreement to completely eliminate the duty of loyalty.
• Modification of the duty of loyalty. The Delaware Limited Liability Company Act allows the limited liability company agreement to modify the duty of loyalty.
• Ratification of breach of duty of loyalty. The Delaware Limited Liability Company Act permit the limited liability company agreement to allow all of the members of a member-managed LLC or managers of a manager-managed LLC to authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty (ratify).
• Identifying activities that do not violate the duty of loyalty. The Delaware Limited Liability Company Act permits the limited liability company agreement to identify specific types or categories of activities that do not violate the duty of loyalty

The operating agreement may not exonerate a member or manager for liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.¹³

Does Delaware law permit LLC domestication or conversion?

A Delaware LLC may effectively move to another state by changing the law that applies to the LLC—a process known in Delaware as conversion.¹⁴

May an LLC member withdraw (voluntarily dissociate) from the LLC?

LLC law is based in large part in partnership law, which (unlike corporate law) treated partners as having an obligation to continue to participate in the venture. A member that wants to divest himself of his interest in the LLC and cease to be a member may sometimes do so by withdrawal.

The default provisions of the Delaware Limited Liability Company Act do not prohibit a member’s withdrawal from the LLC. The limited liability company agreement may prohibit a member from withdrawing from the company. A withdrawal prohibition in the limited liability company agreement is absolute. A member cannot withdraw from the company if the limited liability company agreement disallows it.

The default provisions of the Delaware Limited Liability Company Act do not require the LLC to redeem a withdrawing member’s membership interest in the LLC.

Does Delaware LLC law allow member expulsion?

The default provisions of the Delaware Limited Liability Company Act do not deal with the LLC’s ability to involuntarily dissociate (expel) a member from the LLC in certain circumstances. The limited liability company agreement may allow or prohibit expulsion.

What charging order protection applies to Delaware LLCs?

LLCs benefit from a feature known as charging order protection. Charging order protection limits the ability of a member’s creditors from seizing LLC assets (outside liability protection). Under the Delaware Limited Liability Company Act:

On application by a judgment creditor of a member or of a member’s assignee, a court having jurisdiction may charge the limited liability company interest of the judgment debtor to satisfy the judgment. To the extent so charged, the judgment creditor has only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled in respect of such limited liability company interest.¹⁵

A charging order is the exclusive remedy for creditors of a member.¹⁶

What creditor notification requirements apply upon dissolution of a Delaware LLC?

A Delaware LLC is dissolved by filing certificate of cancellation. The Delaware Limited Liability Company Act does not require notice to creditors on liquidation. Delaware rules for involuntary windup¹⁷ and grounds for judicial dissolution ¹⁸ should also be considered.

1. See 6 Del. C. § 18-101(9).
2. Title 6, Subtitle II, Delaware Code.
3. 6 Del. C. §§ 18-101 et seq.
4. 6 Del. C. § 18-101(2).
5. 6 Del. C. § 18-215(a).
6. 6 Del. C. § 18-101(13).
7. 6 Del. C. § 18-101(12).
8. 6 Del. C. §§ 18-302(d) and 18-404(d).
9. 6 Del. C. § 18-101(10).
10. 6 Del. C. § 18-1104. The Delaware General Assembly’s summary of that provision clarifies that the purpose of the provision is to “confirm that in some circumstances fiduciary duties not explicitly provided for in the limited liability company agreement apply” and that “Section 18-1101(c) continues to provide that such duties may be expanded, restricted or eliminated by the limited liability company agreement.”
11. 6 Del. C. § 18-1104.
12. 6 Del. C. § 18-1104.
13. 6 Del. C. § 18-1101(e).
14. 6 Del. C. § 18-216(a).
15. 6 Del. C. § 18-703(a).
16. 6 Del. C. § 18-703(d).
17. 6 Del. C. § 18-801(a).
18. 6 Del. C. § 18-802.