State Law Management Flexibility and Simplicity

April 13, 2006

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When choosing a state in which to form your business entity, you need to weigh the relative advantages and disadvantages of the laws in certain states.

Some states create mandatory voting rights for all members of a limited liability company (LLC) on certain issues, even when the LLC is managed not by all the members, but by a small group of members who are termed the "managers." This can cause confusion and can make certain votes illegal. It also can interfere with an estate planning strategy--the use of the family limited liability company, where children are given nonvoting interests.

LLC statutes in some states make it clear that members can be accorded no voting rights at all, on any matter whatsoever. Delaware is one of those states. When the law in the home state accords all members certain mandatory voting rights, consideration should be given to forming the LLC in Delaware, or in some other state that allows the owner to completely eliminate voting rights for selected members.

In addition, the Delaware LLC statute may offer greater protection in the event one of the LLC members declares bankruptcy.

Moreover, the Delaware LLC statute provides incredible flexibility and simplicity in forming and operating the LLC. It has no counterpart in statutes governing corporations (nor even in LLC statutes found in other states). For instance, it allows the forming of an entity within an entity, thus eliminating the need to form separate LLCs (or corporations) for each separate operating activity carried out by the business.

Each entity within the single LLC can have its own accounting system, own its own assets and be liable only for its own debts, as if each entity were a separate LLC. Thus, in many cases, a single LLC can be used to manage the holding entity, as well as the multiple operating entities (see our discussion of using multiple holding and operating companies).

This may lead to fee savings, as the single LLC would require a formation fee in Delaware and a single registration fee elsewhere where it does business. It also eliminates the question as to whether an out-of-state holding entity also must register to do business in other particular states.