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Limited Liability Company (LLC)

A limited liability company, or LLC is a business organization structure that allows for certain favorable tax treatments, as well as personal liability protection, for the “members” involved. It is important to note that the specific structure and status can vary from state to state so complete consideration to the state’s laws in which the LLC will be formed is crucial.

An LLC as a business structure model allows for multiple owners, or “Members,” and a “Managing Member,” to enjoy limited liability. The Managing Member is typically the figure head of the organization and is responsible for it’s management. The profits or losses of the business organization pass directly through to the Member’s personal income tax return (IRS Form 1040). The LLC files a Form 1065, then lists each member’s taxable profit on IRS Form K-1. The net profit of the LLC is not considered to be income earned by the Members (though it can be for the Managing Member as a special “fringe benefit” treatment–see below), and thus is not subject to self-employment tax.

Advantages of the LLC

  • An LLC allows for an unlimited number of Members; however, if the LLC has just one owner (Member), it will be taxed as a sole proprietorship.
  • The LLC allows for the “special allocation” of profits–the disproportionate splitting of Member profits and losses (in different percentages than their respective percentages of ownership). This means that Members can enjoy the benefits of receiving profits (and writing off losses) in excess of their individual ownership percentage.
  • The Members enjoy Limited Liability, which means they are mostly personally protected from any liability of the LLC and successful judgments, as well as from the LLC itself.
  • Managing Members’ share of net profit is considered earned income because the Managing Member is considered to be an active owner–therefore qualifying the Managing Member for special “fringe benefit” treatment.
  • The Members’ share of the bottom-line (“net”) profit of an LLC is not considered earned income, and therefore is not subject to self-employment tax.
  • Members are compensated using either distributions of profit or guaranteed payments. A distribution of profit allows each member to pay themselves by merely writing checks–whenever they need the money (provided the business has the available cash). Guaranteed payments represent earned income to the members, thereby qualifying them to enjoy the benefits of tax-favored “fringe benefits.”
  • The Managing Member of an LLC can deduct 100% of the health insurance premiums he or she pays, up to the extent of their pro-rata share of the LLC’s net profit, because the profit is considered earned income. Note: If a member has earned income, he or she will also qualify.
  • A Corporation can be a member of an LLC. This allows you to create an additional level of ownership, which is designed to create an entity that can offer such traditional “fringe benefits” as retirement plans and an additional level of protection from liability.
  • As a Member, you can contribute capital or other assets to the LLC, or loan the LLC money to put dollars or value into the business. You can take dollars out by taking a repayment of your loan (plus interest), a distribution of profit or a guaranteed payment. If any of the members die, the LLC can continue to exist–subject to the unanimous positive vote on the part of all remaining members.

Disadvantages of an LLC

  • Each Member’s pro-rata share of profits represents taxable income–whether or not a member’s share of profits is distributed to him or her.
  • The Managing Member’s share of the bottom-line profit of the LLC is considered earned income, and therefore is subject to self-employment tax.
  • The Members’ share of bottom-line profit is not considered earned income because the Members are considered to be inactive owners; therefore, the Members do not qualify for special tax-favored “fringe benefit” treatment.
  • As a member of an LLC, you are not allowed to pay yourself wages.

Additionally, the LLC shares a few benefits over other business structures–for example, while a Sub-chapter “S” corporation may allow for many of the same protections and asset distribution facilities, they are limited to 75 “stockholders,” and none of these stockholders can be in the form of a Corporation nor IRA’s (in direct contrast to an LLC which does permit Corporations as “Members”)–thus limiting this option to smaller organizations or forcing the buyback or buyout of stockholders for those organizations wishing to convert.

The main reasons for LLC Formation or Limited Liability Company organization are lawsuit protection, credibility, tax savings, deductible employee benefits, asset protection, anonymity, the ease of raising capital, creating a separate legal entity for personal protection, Forming an LLC has a broad range of powers beyond that of a sole proprietorship, small claims court benefits, separate liability for corporate debts, and perpetual duration. After LLC Formation or LLC incorporation you create a separate legal person. You are a shareholder. You can control the corporation. However, when your business is sued you can be protected from being sued personally after Forming an LLC or LLC Formation.

Reducing Personal Liability

When you are Forming an LLC or LLC incorporation you create a separate person from the one or ones who own it. Therefore, when Forming an LLC or your LLC Incorporation is sued, there are provisions in the law to protect the owners (members) and managers from personal liability. Once you do business with the public or have even one employee, you are wide open to legal liability. Year after year there are thousands of us who lose nearly everything we have due to personal liability with our unincorporated businesses. In addition, once after LLC Formation it is important that your business follows certain, relatively simple, formalities so that it looks and acts like a separate legal entity.

Forming an LLC Tax Advantages

There are more tax deductions available after Forming an LLC than to businesses that are not LLCs. A few examples of the benefits you can enjoy when you form a Limited Liability Company include medical expenses, pension plan, business trips and entertainment. It is reported the group with the highest percentage of tax audits is the one that includes the Schedule “C” form filed by the self-employed. The audit rate for the LLC Corporation is much lower than the self-employed. You may own and be employed by your LLC Incorporation at time same time, thus, eliminating the Schedule “C” self-employment return from your list of filed IRS tax documents. The IRS seems to give preferential treatment after Forming an LLC and LLC Formation with regard to tax deduction.

Deductible Employee Benefits

When you are Forming an LLC you can provide for a wide-array of tax deductions for you and your employees. Even a one-person Forming an LLC or LLC incorporation can enjoy tremendous tax-deductible benefits such as health insurance deductions, travel deductions, automobile deductions, entertainment deductions, recreational facilities and many more. One of the most beneficial deductions is the pension plan or 401K. Money placed in a properly structured pension plan is tax deductible and the funds grow tax-free for retirement. These outstanding benefits alone can pay for Forming an LLC or your LLC Formation many times over.

LLCs and Asset Protection

A lawsuit typically comes from one of two directions: business or personal. When your business is sued – someone slipping and falling in your place of business, getting into an automobile accident during working hours, for example – there are provisions in the law so that either Forming an LLC or an LLC Corporation can protect you from being sued personally. However, when you are sued personally – getting into an automobile accident during non-working hours and getting sued for more than your insurance coverage, for example, the Forming an LLC or LLC Formation may provide better protection. A Forming an LLC has members. LLC incorporation has shareholders. Corporate law allows your stock to be confiscated in a personal lawsuit. In contrast, there are provisions in the law such that when you are sued personally, your membership in your LLC may be protected from being taken away from you. This is one reason why the Forming an LLC has become the most popular choice for owing assets such as real estate.

LLCs and Anonymity

Owning an asset in your own name, such as a business, an investment property or an automobile, provides an easy target for one performing an asset search. Before initiating a lawsuit, it is quite common for an attorney to perform an asset search. If no assets can be located in your name this may decrease the chance that litigation will be pursued. Placing assets in the name of a LLC Formation and Limited Liability Companies may provide a cloak of privacy between you and those contemplating legal action against you. This privacy is enhanced when “nominee” managers are listed. With the Companies Incorporated Nominee Privacy Service, you retain ownership and control of your company. However, you elect Companies Incorporated representatives (who have no control or ownership of your Forming an LLC) to be listed in the public records.

Raising Capital

There is a greater source of capital available to LLC Corporation and LLC Formation than to partnerships or proprietorships. Because Forming an LLC is separate from the owners, people tend to be more willing to invest money without accepting liability or responsibility for company business. The Forbes 400 list of wealthiest Americans are full of individuals who hold the highest percentage of their wealth through ownership of companies they or their family members started. Many sole-proprietorship or partnership businesses are sold for one to two times annual earnings. Whereas, many companies are valued at between 12 to 25 times annual earnings or more.

Separate Legal Entity Status

Because you and your LLC incorporation are two separate legal entities, lawsuits brought against your company do not need to affect you personally. When your Limited Liability Company borrows money, there are measures such that you are not personally liable to repay the debt. Forming an LLC remains after the life of the owner(s). However, a sole proprietorship ceases to exist after the life of the owner.

Broad Range of Powers

Forming an LLC may engage in any lawful activity, including, but not limited to the following:

  • Forming an LLC has the power to hold, purchase and convey real property and personal property and to mortgage or lease any such real and personal estate with its authorization. An LLC incorporation has the power to hold real and personal property in any state, territory or country.
  • Has the power to make contracts.
  • May exist continuously, even after the death of the owner(s).
  • Has the power to borrow money when necessary for the transaction of its business, or for the exercise of its company rights, privileges or franchises, or for any other lawful purpose of its formation.
  • Forming an LLC and LLC Formation can issue bonds, promissory notes, bills of exchange, debentures, and other obligations and evidences of indebtedness, payable at a specified time or times, or payable upon the happening of a specified event or events, whether secured by mortgage, pledge or otherwise, or unsecured, for money borrowed, or in payment for property purchased, or acquired, or for any other lawful object.
  • LLC Corporation and LLC incorporation has the power to sue and be sued in any court of law or equity.
  • Has have power to appoint such officers and agents as the affairs of the company shall require, and to allow them suitable compensation.
  • Has the power to make an operating agreement not inconsistent with the constitution or laws of the United States, or of the State in which the LLC is formed, for the management, regulation and government of its affairs and property, the transfer of its stock, the transaction of its business, and the calling and holding of meetings of its stockholders.
  • Has the power to wind up and dissolve itself, or be wound up or dissolved.
  • Has the power to adopt and use a company seal or stamp, and alter the same at pleasure.
  • Has the power to guarantee, purchase, hold, sell, assign, transfer, mortgage, pledge or otherwise dispose of the units of membership of, or any bonds, securities or evidences of the indebtedness created by, any other company, while owners of such units, bonds, securities or evidences of indebtedness, to exercise all the rights, powers and privileges of ownership, including the right to vote, if any.
  • Has the power to purchase, hold, sell and transfer units of its own membership, and use therefore its capital, capital surplus, surplus, or other property or fund.
  • Has the power to conduct business, have one or more offices, and hold, purchase, mortgage and convey real and personal property in any of the several states, territories, possessions and dependencies of the United States, the District of Columbia, and any foreign countries as allowed by law.
  • Has the power to do all and everything necessary and proper for the accomplishment of the objects enumerated in its certificate or articles of organization, or any amendment thereof, or necessary or incidental to the protection and benefit of the LLC, and, in general, to carry on any lawful business necessary or incidental to the attainment of the objects of the LLC, whether or not such business is similar in nature to the objects set forth in the certificate or articles of organization of the company, or any amendment thereof.
  • Has the power to make donations for the public welfare or for charitable, scientific or educational purposes.
  • Has the power to enter into partnerships, general or limited, or joint ventures, in connection with any lawful activities, as may be allowed by law.

Small Claims Court

A Limited Liability Company may send a manager, officer, director or an employee to represent the company in most small claims courts. Unlike a sole proprietorship, this can free up the time of the owner to operate the business while employees take care of legal matters.

Separate Liability for Corporate Debts

Forming an LLC and LLC Formation are separate from those who own it. If the company loses a lawsuit or has a debt it cannot pay, Forming an LLC or the LLC Formation itself is responsible. The Limited Liability Company can provide a strong shield to protect the personal assets of the members and managers. In contrast, with a sole proprietorship or partnership, the owners can lose personal assets in a business lawsuit. If the members and/or managers have personally guaranteed corporate debts, of course, they can be held liable. In addition, Forming an LLC must be established and operated properly for the legal shield to remain in place. For maximum protection, it is legally prudent to treat the LLC Corporation as a separate legal entity. For example, it is important to pay company expenses with company money (or be sure the company promptly reimburses you for business expenses if you have paid them personally). Conversely, you would not pay your personal electric bill with company money. Instead, the company pays you a salary from the company checking account (which is a tax-deduction for the company). You deposit your salary check in to your personal checking account and use those funds to pay your personal electrical bill.

Other Information

Do I need two members?

Many states allow for the creation of single-member LLCs. Other states require two or more members. It is important to remember that the IRS may apply different tax liabilities to a LLC with only one member (taxed as a corporation or disregarded entity for tax purposes) than it does to an LLC with more than one member (taxed as a partnership by default).

Must I hold LLC meetings?

In many states, an LLC is not required to hold the simple member/manager meetings in order to maintain the protection provided against liability as are required by officers/directors and shareholders of corporations. For example, California does not require member/manager meetings unless the LLC’s Articles of Organization specifically require them

Who votes in an LLC?

In most cases, voting rights are proportional to the percentage of membership (“ownership”) interest. However, the articles of organization or operating agreement may establish a different set of criteria for voting rights

Can I sell Member Shares?

Typically, member shares may be sold only upon the approval of members holding a majority in interest, unless otherwise stipulated by the articles of organization or the operating agreement..

How long does an LLC endure?

Many states now allow an LLC to have a perpetual existence. In the past LLC’s were required to provide a date on which the LLC’s existence would terminate. In most cases, unless otherwise provided in the articles of organization or a written operating agreement, an LLC is suspended upon death, withdrawal, resignation, or bankruptcy of a member, with some exceptions.

Do I need an Operating Agreement?

Yes, the complete the creation of an LLC includes the drafting of an Operating Agreement. The Operating Agreement must be created, either prior to or directly after the filing of the Article of Organization. An Operating Agreement may be either oral or written.

What paper work is required to form an LLC?

The Articles of Organization must be legally drafted and filed with the state office. Initial fees must also be paid at this time.

What are the disadvantages of a LLC?

There is no reliable continuity. If a member is dismissed, dies, is disabled or resigns, the LLC is dissolved unless the Articles of Organization or Operating Agreement state otherwise. When the LLC is formed, some states require that a date for the future dissolution of the LLC be recorded. On the other hand, a corporation would continue to exist as an entity in the event of the death, disability or dismissal of a director(s) or officer(s). There a great deal of paperwork involved in the creation LLC. Companies Incorporated prides itself on making this process as expeditious and efficient as possible. If you are considering an LLC, please contact our associates to discuss how we can help you.

What State Should I Form my LLC In

This is a very important question that bears careful consideration of a number of factors. While you are not required to incorporate in the state of your residence, you must consider things such as analyzing costs of incorporating as a foreign corporation or LLC in another state, the physical location of your facilities, if any, and a careful review of what advantages incorporating in a state other than your own might provide.

The fees, regulations and corporate governing laws vary from state to state, as do the rights and privileges assigned to members, managing members, directors, and boards. It is generally simpler and most cost effective to form the LLC in your home state or state of residence, especially if your LLC will primarily conduct business in just one state. Forming the LLC in your home state will reduce the amount of filings and not subject the LLC to foreign filing requirements and fees. However, there are some very real advantages, depending on the type of business you intend to operate and tax situations you wish to take advantage of, when incorporating in other states such as Delaware and Nevada.

When conducting business in any state other than the one in which you or your business is incorporated in, you will be requires to file a “Foreign Qualification” for that particular state, which will increase the fees and paperwork (e.g. your corporation is formed in Delaware but you wish to conduct business in California, California will require a Foreign Qualification)–not a tremendous hurdle, especially if the business volume warrants the added expense, but definitely worthy of consideration. Consider too that a foreign corporation or LLC, once qualified to conduct business in another state, is subject to franchise taxes and annual report fees from both the state of incorporation and the qualifying state in most instances. The advantage of forming an LLC in a state with very low or no corporate income tax is thus not as great as it may in appear in some instances.

Considerations about Forming an LLC in Delaware or Nevada

Because Delaware and Nevada are commonly recognized as states that are pro-business and suitable for many types of businesses, they tend to be the states that attract “foreign formations.”

Delaware

Delaware is considered to be a corporate haven by many, and is considered to have more “modern” and flexible laws governing corporations formed there, as well as being very business-friendly. As such, corporate and LLC applications are seen as a priority, with excellent service and efficient turn around provided by the local government staff–generally quicker than most other states. Over half of publicly traded companies and more than 58% of the Fortune 500 companies are incorporated in Delaware for the benefits afforded these larger corporations, especially those that “go public,” or sell stocks on the open market.

Some of the benefits include:

    A low initial incorporation or LLC formation cost
    No corporate income tax for corporations incorporated in Delaware but not transacting business in the state.
    The Delaware Court of Chancery, a separate legal court system, does not use juries, but uses judges appointed for their knowledge of corporate law in dealing with corporate legal decisions.
    One person can hold all of the officer positions of the corporation, and these names are not required to be listed in the articles of incorporation.
    Shareholders, directors, and officers of the corporation need not be residents of Delaware.
    Shares of stock owned by persons outside of Delaware are not subject to Delaware taxes.

Nevada

Nevada is notable for its lack of state corporate income tax and personal income tax–this can be a boon if taxation is a major consideration. It also allows for a greater level of privacy for corporations and their shareholders. As such, Nevada can be particularly favorable for corporations located in California and other Western US states. While any public corporation can benefit from Nevada’s flexible statute, Nevada is particularly attractive to privately-held corporations, as its statute’s default provisions geared towards favoring management. As is the case with forming a corporation in Delaware, critics of the formation of corporations in Nevada believe that its laws and courts are excessively friendly to corporations.

Benefits of forming a Nevada Corporation:

    Flexibility to a Board of Directors in managing the affairs of a corporation,
    Permitting management to put in place strong protection from hostile takeovers.
    Courts in that state are more focused on the application of corporate law than the courts of most other states
    Nevada’s courts are developing a strong body of case law that serves to give corporations and their counsel guidance on matters of corporate governance.
    Nevada’s tax structure is also a large benefit to incorporation in Nevada. Nevada has no franchise tax. It also has no corporate income tax or personal income tax.

Disputes over the internal affairs of Nevada corporations are filed in the Nevada State District Courts, and can be appealed to the Nevada State Supreme Court.

Delaware LLCs

In October of 1992, Delaware law recognized Limited Liability Companies (LLC)–and the rush was on. As the name implies, forming a Limited Liability Company offers members limited liability protection and certain tax benefits, especially in the business and corporate-friendly state of Delaware. And Fortune 500 companies tend to agree–over half of the Fortune 500 companies choose to incorporate in Delaware. The tiny state of Delaware is fast becoming renown as a business haven for mid to large corporations and LLCs looking for a business-friendly environment, with courts and systems that understand the sometimes-complicated corporate world. A large part of the attraction to this state is the fact that the state charges no corporate income tax on companies not operating within the state, though all Delaware corporations and LLCs must pay an annual corporate franchise tax. Delaware’s laws (i.e. the Delaware General Corporation Law) were designed to allow maximum flexibility to corporate structures and operations. With the added flexibility of an LLC, one can begin to see the allure of forming the LLC in Delaware. Forming the LLC in Delaware also offers members protection from business debts and lawsuits, potential taxation benefits, increased confidentiality, and greatly increased business flexibility. While there are a number of factors that must be considered before deciding that Delaware is the state best suited for your company, if these factors are applicable to you and your business, then forming your LLC in Delaware can offer a substantial advantage to you and your company.

Factors to Consider

An LLC offers the benefits and flexibility of ownership as a partnership, while at the same time offering the limited liability and asset protections of a corporation. In addition to this limited liability protection, there are also substantial tax benefits to be garnered from the formation of an LLC. A Delaware LLC allows for as few as one member or as many members as your company is willing to have, with no limitations on numbers, and no limitations with respect to types of stock. The company must select a managing member who is typically the figure head of the organization and is responsible for it’s management. The profits or losses of the business organization pass directly through to the Member’s personal income tax return (“pass through taxation”), with no taxation at the LLC level. The net profit of the LLC is not considered to be income earned by the Members (though it can be for the Managing Member as a special “fringe benefit” treatment–see below), and thus is not subject to self-employment tax.

Once the election to form an LLC is made, it is imperative that a well-written Operating Agreement be drafted that specifically outlines the distribution methods, rights and benefits of members and the managing member, capitalization, and any other rights, duties, assignments and responsibilities necessary for the proper operation of the LLC. The Operating Agreement can be compared to the bylaws of a corporation, wherein a properly written one, and strict adherence to it, helps to ensure the “corporate veil” protection of the LLC.

Another often-cited benefit of an LLC is that it is not subject to the same, stringent corporate formalities that a C or S corporation is subject to. It can be simpler to establish and run an LLC, provided that a quality, well written Operating Agreement is in place.

Business Knowledgeable Courts

One of the primary reasons that Delaware is considered a business haven is because of the understanding that their court system is very sophisticated in its understanding and treatment of corporations. The courts in that state are generally regarded as more experienced in the application of corporate law than those of other states, mainly a by-product of the sheer number of companies incorporated there. Disputes over the internal affairs of Delaware corporations are frequently filed in the Court of Chancery, which is one of the last separate courts of equity (as opposed to “law”) in any U.S. state. Being a court of equity, there are no juries, and its cases are decided by the judges (or “Chancellors”) of the Court. These chancellors tend to know the “ins and outs” of the complicated corporate transactions and meanderings and hence render sophisticated judgments on issues that may baffle ordinary civil courts. Because the Court of Chancery cannot award money damages, Delaware’s Superior Court, the trial court of general jurisdiction, also hears and considers a large number of cases between corporations involving claims for money. Finally, due to the number of corporations which choose to incorporate in Delaware, the Federal Bankruptcy court in that state handles many high-profile insolvency matters, and the United States district court for the district of Delaware considers many patent disputes between Delaware corporations.

Usury Laws

In the 1980s, then-Delaware Governor Pierre Samuel du Pont IV shepherded the Financial Center Development Act through the Delaware General Assembly. The act was instrumental in eliminating virtually all usury laws in Delaware, giving banks an immediate incentive to start credit-card subsidiaries in Delaware, as Federal law provides that usury limitations, or lack thereof, are limited to those of a bank’s home state, irrespective of where the bank conducts business. This encouraged an explosion in competition among banks to issue credit cards with varying rates for various levels of consumer credit. And because of Delaware’s minimal regulation of interest rates charged, banks were able to issue high-interest rate cards to high-risk consumers.

Advantages and Benefits of Forming a Delaware LLC

  • Asset Protection from Liability. Delaware LLC members enjoy Limited Liability, which means they are mostly personally protected from any liability of the LLC and successful judgments, as well as from the LLC itself. Couple that with the Business Court’s reputation for efficiency and fairness with their experience in corporate law, and the benefit becomes quite clear.
  • Business and Corporation knowledgeable court systems.
  • Banking-friendly Usury laws.
  • Tax Advantages. Delaware charges no corporate income tax on companies not operating within the state, though all Delaware corporations must pay an annual corporate franchise tax.
  • A Delaware LLC allows for “multi-tiered” ownership wherein an S or C corporation can be a member–this can allow for substantial tax benefits, and increased liability protection.
  • Delaware allows for “single member” LLCs.
  • The LLC allows for the “special allocation” of profits–the disproportionate splitting of Member profits and losses (in different percentages than their respective percentages of ownership). This means that Members can enjoy the benefits of receiving profits (and writing off losses) in excess of their individual ownership percentage, so long as it is clearly delineated in the Operating Agreement.
  • Managing Members’ share of net profit is considered earned income because the Managing Member is considered to be an active owner–therefore qualifying the Managing Member for special “fringe benefit” treatment.
  • The Members’ share of the bottom-line (“net”) profit of an LLC is not considered earned income, and therefore is not subject to self-employment tax.
  • Members are compensated using either distributions of profit or guaranteed payments. A distribution of profit allows each member to pay themselves by merely writing checks–whenever they need the money (provided the business has the available cash). Guaranteed payments represent earned income to the members, thereby qualifying them to enjoy the benefits of tax-favored “fringe benefits.”
  • The Managing Member of an LLC can deduct 100% of the health insurance premiums he or she pays, up to the extent of their pro-rata share of the LLC’s net profit, because the profit is considered earned income. Note: If a member has earned income, he or she will also qualify.
  • A Corporation can be a member of an LLC. This allows you to create an additional level of ownership, which is designed to create an entity that can offer such traditional “fringe benefits” as retirement plans and an additional level of protection from liability.
  • As a Member, you can contribute capital or other assets to the LLC, or loan the LLC money to put dollars or value into the business. You can take dollars out by taking a repayment of your loan (plus interest), a distribution of profit or a guaranteed payment. If any of the members die, the LLC can continue to exist–subject to the unanimous positive vote on the part of all remaining members or a proviso in the Operating Agreement.
  • Tax Advantages. Delaware allows for pass through taxation of LLCs and partnerships, and does not collect personal, corporate, inventory, franchise, gift, business occupation or stock transfer taxes. And with the federal “check box” method of taxation, the Delaware LLC can choose to be taxed via the partnership model with “pass through” taxation. This can amount to a substantial savings to a business.
  • The Delaware LLC has a perpetual life and membership is easily transferable. It is advisable to enter into a Members’ Agreement if alternative conditions are required.

Delaware LLC Fees and Costs

Aside from a $60 state Franchise fee, based upon the number and value of shares, LLCs and most Limited Partnerships pay $200.00 every year

Charging Order

If a judgment is awarded against the LLC itself, it may be levied, and LLC’s property seized or sold in payment, much in the same manner that a corporation would be treated. Conversely, if a judgment is awarded against a particular member, and with a properly written operating agreement stating as such, distribution usually cannot be compelled to satisfy a member’s judgment debt (this is why it is critical to have a well crafted operating agreement, you’re your protection be mitigated). Creditors or judgment debtors have to satisfy themselves with a “Charging Order” that grants them rights to distributions made by an LLC to a particular member named in the judgment. This gives them the rights to that distribution, but does not affect the rights, assets, or distributions of other members or of the LLC as a whole. These types of protections characterize the attraction to LLCs by potential investors.

It should be apparent that forming your LLC in Delaware can offer a tremendous business advantage to your company, especially if you intend to operate out of state or in other jurisdictions. Potential investors are attracted to the security and asset protection implied by the business-savvy court systems and general corporation-friendly laws in Delaware, and the state offers a tremendous amount of benefits in the form of protection from liability, asset protection, taxation, and business flexibility. Incorporating or forming your LLC in Delaware will go a long way in making your company more credible in business and in investment-sourcing.