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Delaware Limited Liability Companies (LLCs) FAQs

Limited Liability Companies (LLC’s)

  • A “Limited Liability Company,” or “LLC,” is a Type of Entity (company) which is often described as a hybrid between a Corporation and a Partnership.
  • The LLC features the liability protection of a Corporation, in that the liability of all members is limited to their investments in the LLC (unless they personally guarantee other debt incurred by the LLC), but is more flexible in respect to management structure and is usually considered to offer greater ease of administration.

How are LLC’s Managed?

  • The management of a Delaware LLC is almost unlimitedly flexible.
  • Delaware LLC’s can be managed by the Members (owners) or by Managers (employees or agents who do not hold an ownership stake in the company).
  • Members can be divided into classes or can all hold the same voting rights or entitlements.
  • Any degree of restrictions or rights can be assigned to a Member, Manager or Class of Members.
  • Here are some examples: All Members can be given equal voting rights and issues are required to be determined by majority vote; or one person can be given absolute control while the other Members have no voting rights and are “silent partners”; or a Single Member LLC automatically passes all decisions by “unanimous consent”.
  • Other arrangements are also possible and can be defined in the Operating Agreement. If the members of the LLC desire, they can even form a Board of Directors and appoint Officers, although this is neither traditional nor necessary.

How are LLC’s Taxed by the IRS?

  • The LLC is the most flexible entity (company type) currently in existence.
  • LLC’s can be taxed several ways.
  • A one-Member LLC is, by default (unless the LLC elects otherwise), taxed by the IRS as a “Disregarded Entity”; which means the profits and losses of the LLC are reported on the Member’s personal income tax return and no Corporate Income Tax return is filed.
  • An LLC with two or more members is taxed, by default, as a Partnership, which is also taxed as a Disregarded Entity: taxable income and losses “Pass Through” to its members.
  • Although the income and losses are reported on each partner’s personal income tax return, a partnership must also file an informational report, form 1065 and Schedule K-1.
  • An LLC may also be eligible to elect to be taxed as an S-Corporation, see our article about S-Corporations for more information.
  • The advantages of being taxed in this manner are the avoidance of double taxation that would occur if the company were a C-Corporation plus the possibility of being taxed at a lower rate.
  • An LLC may even be eligible to elect to be taxed as a C-Corporation, if it desires.
  • A C-Corporation may be taxed at a higher rate, but some Member’s prefer to fully deduct Health Insurance and Life Insurance Benefits as the Owner-Employee of a C-Corporation may do.

How are LLC’s Taxed by the Secretary of State of Delaware?

  • LLC’s pay a flat tax of $300 annually to the Secretary of State of Delaware to maintain their Delaware Charter.
  • This tax has no relation to assets, income or activity level.
  • The Delaware LLC tax is due before June 1st each year and is never pro-rated for any reason.
  • If the Delaware LLC Tax is not received by the Secretary of State by the last day of May, a $200 penalty is assessed with 1.5% interest per month.
  • If the LLC Tax is not paid for consecutive years, the Delaware Charter is declared VOID; the company becomes invalid and has no right to transact business or investments as an LLC.

What are the advantages of operating as an LLC for non-resident non-citizens?

  • A Non-Resident Alien (NRA) usually is only subject to U.S. Income Tax on U.S. Source Income.
  • Generally foreign source income received by a nonresident alien is not subject to U.S. taxation.
  • Therefore, a non-resident non-citizen with no Operations (no business activity, no employees) within the US, and no property in the US, pays no US Federal Income Tax.
  • Furthermore, if your only U.S. business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U.S. resident broker or other agent, you are not considered engaged in a trade or business in the United States. [Source: http://www.irs.gov website, November 18, 2009]
  • A Delaware LLC is not required to disclose the names of the Members on the Certificate of Formation and does not file an Annual Report in Delaware. The identity of the Members is not Public Record.
  • The Delaware Limited Liability Company Act does not require that a limited liability company agreement be in English.

What is the Operating Agreement?

  • Most “Articles of Organization”, also known as a “Certificate of Formation”, are deliberately spare in detail, defining only the minimum traits required to establish the LLC.
  • The reason for this is to allow the LLC to define its own provisions in its Operating Agreement; which saves the LLC from having to file an Amendment with the State if a change is needed, and keeps the organizational details of the company private.
  • An Operating Agreement is similar to the “By-Laws” of a Corporation in that it defines the specifics of the regulation of the of the company’s business and is similar to a Limited Partnership Agreement in that it defines the terms that the Members will adhere to regarding admission of new members, assignment of interest, appointment of voting rights and dissolution of the association.
  • The following standard Articles are included in the model Operating Agreement:
  1. Definitions
  2. Organization of the Company
  3. Members (Status, Rights and Duties of)
  4. Management of the Company
  5. Managers (Status, Rights and Duties of)
  6. Officers
  7. Capital
  8. Distributions to Members
  9. Profits and Losses
  10. Admission and Withdrawal of a Member; Transfer of Member’s Interest
  11. Conversion and Merger with Other Entities
  12. Dissociation, Dissolution, Winding Up & Termination
  13. Books and Reports
  14. Miscellaneous
  • Caution: Please note that alterations to provisions regarding Continuity of Life, Centralization of Management, Free Transferability of Interest, or Limited Liability may result in the IRS taxing your LLC as a Corporation.
  • Please contact a qualified tax professional and/or attorney if you have questions regarding these provisions.
  • If you wish to include additional provisions please indicate that you want the Word .doc template.
  • You are free to alter, add or delete any material you wish.
  • DBI does not alter, add or delete provisions from the model template. If you wish to alter the template and you do not feel competent to do so without assistance, please consult an Delaware attorney.

Is there a downside to a Delaware LLC?

  • The benefits for owner-employees, such as health care or life insurance, are only partially deductible from these Members’ individual federal income tax returns, if the Delaware LLC is taxed as a Pass-Through entity or S-Corporation.
  • This is typically not a primary concern for entrepreneurs who are considering a Delaware LLC.
  • Unlike shares of Stock, Membership units of a Delaware LLC cannot be publicly traded.
  • If you are trying to raise Capital, some potential investors may be less familiar with Delaware LLC’s and the Delaware LLC’s Membership Interest Share versus the Corporation’s Stock Share.

How to Start a Delaware LLC?

  • We would be happy to help you start your Delaware LLC. We can help you select your company name, reserve your company name, prepare your articles of formation, and file the certificate with the State of Delaware.

 




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