A Limited Liability Company has become a very popular choice of business entity for many small business owners and is an excellent choice for a single owner venture, a small family business or a joint venture between two companies. Also, LLCs are often used today for holding assets like real estate, boats, aircrafts, etc.
An LLC acts in many ways like an S Corporation without much of the required corporate recordkeeping, issuing of stock certificates, and paperwork hassles. The LLC is a business ownership structure that permits owners to pay business taxes on individual income tax returns like a partnership, or for a one-person LLC like a sole proprietorship. In addition to this, the LLC offers legal protection of limited liability for business debts and judgments like shareholders of a corporation.
You can form an LLC with only one member, and members need not be residents of Delaware, or even U.S. citizens. In addition to this, other business entities (such as a Corporation or another LLC) can be LLC owners. Members of an LLC can divide earnings and ownership percentages based upon their Operating Agreement.
Features of a Delaware LLC
- Delaware does not impose a business income tax unless you transact business in the state.
- Delaware does not have residency or citizenship requirements for forming an LLC.
- Yearly franchise taxes are charged at one low, flat rate of $250 to all LLCs.
- There is no sales tax on goods and services in Delaware.
- Minimal reporting and disclosure is required – only the company name and the name and address of your registered agent.
- The governing document of the LLC is called the Operating Agreement (a contract between the members) and it will define how the entity will be managed, how profit and losses will be divided, how departing or deceased members will be bought out and when meetings are to be held. This agreement is not required to be publicly filed or disclosed with the Delaware Division of Corporations. For additional information please see the Operating Agreement section below.
- The Delaware Limited Liability Company Act allows members to specifically define the business affairs of the LLC, and the conduct of its business in a written Operating Agreement to meet their needs. The policy of the Delaware LLC Act is to allow maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements. Unless the Operating Agreement provides otherwise, the Delaware stature provides automatic or default rules for how an LLC will be governed. This unique contractual flexibility offered by the Delaware LLC Act is not typically found in any other LLC statute.
- With a Delaware LLC, members who are not U.S. citizens and do not reside in the U.S. may be able to avoid U.S. federal taxes on income earned through their LLC business activities conducted outside the U.S.
Features of an LLC
- An LLC is not taxed by the IRS at the entity level, but profits and losses are passed-through to the individual members like a partnership.
- Like a Corporation, the owners have limited liability and are not personally liable for all business debts and judgments.
- Creditors of an LLC member cannot seize control of the assets of the LLC, or a member’s voting rights.
- There are no restrictions on the amount of owners (or members), and they can be individuals or any type of entity, and from anywhere in the world.
Additional Operating Agreement Information
The governing document of the LLC is called the Operating Agreement (a contract between the members) and it will define how the entity will be managed, how profit and losses will be divided, how departing or deceased members will be bought out and when meetings are to be held. It is common practice for an LLC to be managed by all the owners (also called members), and is referred to as “member-management.” However, state law also allows for management by one or more appointed managers who may be members or nonmembers. This arrangement is detailed in the Operating Agreement and known as “manager-management.” If one elects not to have an Operating Agreement prepared, then the default provisions of the Delaware LLC Act will apply to the operation. Basically, an LLC Operating Agreement is a much more flexible document than General Corporation Law which governs the activities of corporations. It is always in the best financial and legal interest of a multi-member LLC to have a knowledgeable general business law attorney professionally prepare an Operating Agreement.
Additional Tax Information
When it comes to taxes, the IRS allows treatment as a partnership or a corporation for LLC’s that have more than one member. Generally, the default tax status for a multi-member LLC is a partnership (filing of IRS Form 1065 with owners receiving a Schedule K-1 which is attached to their individual Form 1040 personal tax return). This is generally known as pass-through taxation, because the LLC itself does not pay income taxes. However, the IRS allows an LLC to elect corporate tax treatment if the owners opt to leave income in their business, which will be taxed at separate corporate income rates. In order to elect to be taxed differently the company must file IRS Form 8832.