Small Business Reading Room

Friday, November 18, 2005

Advantages and Disadvantages of forming an LLC- a basic overview

As mentioned in my post last week about the Fundamentals of Entity Selection, I'm going to share some basic advantages and disadvantages of various entity forms that were discussed in a recent National Business Institute (NBI) seminar on choice of entity selection in Delaware. Information is power, and we want all of our clients to be informed.

This week, I'll take a brief look at some of the basic advantages and disadvantages of forming a LLC in Delaware.

Limited Liability Companies


1. Flexibility in Structure

Member managed? Manager managed? A little bit of both? You decide without cumbersome statutory requirements.

2. Elimination of Fiduciary Duties

It is possible to craft an operating agreement that expressly makes the relationship between members and managers contractual. If agreed to, members and managers could compete with the entity.

3. Freedom of Contract

You want it, you can probably get it. The possibility to draft almost any contractual provision exists. Talk to your attorney about it.

4. Simple Filing Fee and Franchise Tax Structure

There are not complicated formulas. State filing fee for the certificate of formation is a flat $90.00, and the annual franchise tax due by June 1st of each year is a flat $200.00 rate.

5. Easy to Operate

Don't like red-tape? You can draft your LLC agreement to allow for broad management authority and eliminate the need for meetings and resolutions.


1. Lack of Caselaw

LLC's are the new kid on the block. Corporations have a well-established caselaw available that can assist with careful planning for the future. LLC caselaw is still developing.

2. Lack of Uniformity

While the lack of statutory constraints can be a real advantage when organizing your own LLC, it can quickly turn into a disadvantage when dealing with another LLC. Not all LLC's are created equal - you can't assume they all share the same governance.

3. Organizational Issues

Again, flexibility can sometimes be detrimental. The Delaware Limited Liability Company Act doesn't clearly define who is authorized to act on behalf of the LLC. Make sure you keep your paperwork in order showing who was appointed and how they have gained their authority so that it can be traced back to the LLC organizer if necessary.

4. Phantom Income

Yes, the taxman has all kinds or snares and traps. There can be situations where partners in an LLC may be taxed on their share of net income that is reinvested in the business- even if they don't receive a distribution! You definitely should talk to your accountant about how to plan to steer clear of this.

Next week- Basic advantages and disadvantages of Limited Partnerships.


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Delaware Intercorp, Inc.
113 Barksdale Professional center
Newark, DE 19711-3258

"For all the best reasons to incorporate,the best place
is Delaware and the best incorporator is
Delaware Intercorp!"

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