LLC FAQ: Why form an LLC in Delaware?

FAQs about LLC formation in Delaware

At CLF, we frequently form a limited liability company (LLC) for our real estate clients. More often than not, we form the LLC in the State of Delaware. Clients and their investors will sometimes ask, why Delaware rather than the state where the deal sponsor resides or where the property is located?

There are many reasons why Delaware is the premier location for forming entities in the United States:

Delaware Corporate Law is Well-developed and Pro-Business

Delaware takes pride in having one of the most advanced and pro-business statutes in the nation. The state legislature regularly updates the code with input from corporate law practitioners, and accordingly, the code is considered cutting edge and a model for other states. In addition to the code, the court system is designed for business. Corporate disputes are resolved in the Court of Chancery by judges who specialize in this area. The resulting case law is well developed which creates substantive guidance and greater predictability in outcomes. The judiciary and the legislature function together to develop the law, with the legislature at times responding based on the findings of the courts. For these reasons, corporate attorneys across the country know Delaware law, and institutional investors often prefer to invest in Delaware LLCs.

The Delaware Act Provides Superior Liability Protection

Delaware law offers liability protection superior to most other jurisdictions. As is generally true for LLCs and other limited liability entities, if a creditor obtains a judgement against the company—provided that the company is properly formed and maintained—the creditor may not enforce collection against the members’ assets (this is the standard liability protection). Delaware law, however, goes a step further. If a member of an LLC (even if a single member LLC) is subject to a judgment, the creditor cannot take control of the LLC or acquire any of the company assets. Creditors of a member can only receive an economic interest in the LLC’s distributions to that member, not a controlling interest or a right to liquidate the LLC (called a “charging order,” which is the exclusive remedy for creditors of the members). Many other states are less clear on whether the charging order is the creditor’s sole remedy.

The Law Allows for the Tailoring Manager Liability

One key aspect of Delaware corporate law is to honor the principle of freedom of contract by allowing the parties flexibility in drafting their governing documents. An example of the contractual freedom is that the law in Delaware allows a Manager to eliminate (or reduce) its fiduciary duties to the members, thus mitigating risk of investor lawsuits. In an effort to balance the risk allocation and to protect investors, the law expressly provides that the company and its officers may not eliminate the implied contractual covenant of good faith and fair dealing.

The Law Provides Freedom of Contract on a Wide Range of Issues

In addition to contractual freedom related to fiduciary duties, Delaware law provides freedom to contract on a variety of other issues. First, the law permits company agreements to provide for separate classes or groups of members and separate series of LLC interests. There are also many options for voting rights of members. Members can vote on a per capita, number, financial interest, class, group, or any other basis, and members are not required to have voting rights under the agreement. Finally, LLCs have flexibility to contract on issues including indemnification, exculpation, and informational rights. This significant freedom is balanced by the Delaware courts, who respect the considerable freedom given to LLCs, but also have the power to step in to prevent inequitable conduct.

The Costs are Reasonable

The cost of forming and maintaining an LLC in Delaware are reasonable: a $250 initial filing fee and a $150 annual registration fee are generally all that are required for most companies. You will need to hire a registered agent service located in the State which generally costs about $200 per year. Aside from these fees, there are no income taxes, sales taxes, or personal property taxes if the company does not do business in the state. In addition to low costs, formation can be as simple as needed. The law provides no minimum capital requirements and requires no more than a single member to form an LLC. 

The State Allows for Anonymity

Unlike some other states, Delaware law allows managers and members of the Company to remain anonymous. The only public filing for an LLC is the certificate formation which merely lists the company’s name and Delaware registered agent (which can be a corporate service with no other affiliation or ownership in the company). This anonymity makes it difficult for potential creditors to identify the owner of interests in the company and its assets. 

For these reasons, Delaware is considered the national forum for entity creation and is universally accepted and understood by attorneys, lenders, and investors around the country. The lawyers in our firm have vast experience and familiarity with Delaware law concerning LLCs, and hiring separate Delaware counsel is not required. If you have questions about the formation of your real estate LLC, please contact one of the attorneys at CLF.

About the authors

Kevin Caiaccio is the founder of Caiaccio Law Firm and has more than 25 years of experience practicing commercial real estate law. His cut-through-the-noise mentality encourages clients and colleagues to be selective and focus on big-picture solutions. He believes in fighting for what’s important, and filtering through obstacles that distract.

A native of Atlanta, Kevin is a graduate of Georgia State University. He earned his J.D. degree, cum laude, from The University of Georgia School of Law in 1995, where he was a member of the Managing Board and the Editorial Board of the Georgia Law Review. He has been a member of the State Bar of Georgia since 1995.

Melanie Tate is a J.D. candidate at Emory University School of Law. Melanie earned her B.A. in literature from Louisiana State University. She is a 2019 – 2020 legal intern at Caiaccio Law Firm.

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