The LLC is the most popular type of Delaware business formation. In these blogs, we examine all aspects of LLCs, including LLC Operating Agreements.
If you would like to operate your Delaware LLC in the state of New York, you can easily do so after you file for Foreign Qualification.
Foreign Qualification is the process in which the New York Department of State gives your Delaware LLC permission to legally operate in that state.
New York requires a foreign entity to file an Application for Authority as well as a Certificate of Good Standing that shows your Delaware LLC is in compliance as well as in good standing with the state of Delaware. In addition, you will have to pay the filing fee and abide by New York’s publication requirement.
Section 206 of the New York State Limited Liability Company Law requires that:
Within 120 days after the effectiveness of the initial articles of organization, a limited liability company (LLC) must publish in two newspapers a copy of the articles of organization or a notice related to the formation of the LLC. The newspapers must be designated by the county clerk of the county in which the office of the LLC is located, as stated in the articles of organization. After publication, the printer or publisher of each newspaper will provide you with an affidavit of publication. A Certificate of Publication, with the affidavits of publication of the newspapers attached, must be submitted to the New York Department of State, Division of Corporations, One Commerce Plaza, 99 Washington Avenue, Albany, NY 12231.
The fee for filing a New York’s Certificate of Publication is $50.
Keep in mind that not every state in the country mandates a publication requirement; however, New York does.
We are happy to assist you with both the Foreign Qualification process in New York as well as the publication requirement, as it is limited to certain publications with specific circulation and publishing frequency.
For more information about filing for Foreign Qualification in New York, please contact us in any of the following ways:
Under Delaware law, a series LLC (limited liability company) may be composed of individual series of membership interests. This type of entity is referred to as a Delaware series LLC.
Each series is effectively treated as a separate entity, meaning the debts, liabilities, obligations and expenses of one series cannot be enforced against another series of the LLC, or against the LLC as a whole.
Each series can hold its own assets, have its own members, conduct its own operations and pursue different business objectives, but each series remains insulated from claims of members, creditors or litigants pursuing the assets of or asserting claims against another series.
The structure of the series LLC, which is often likened to a piece of honeycomb, is Delaware’s version of the "segregated portfolio companies" which are widely used (under various names) in the Cayman Islands, British Virgin Islands and other non-U.S. jurisdictions.
The Delaware series LLC reduces the fees incurred in creating and maintaining separate business entities for different ventures or investments. Only one filing fee is required to form a Delaware series LLC, regardless of the number of series it contains.
In addition, this type of LLC is treated as one entity for Franchise Tax and Registered Agent Fee and service purposes, meaning it is assigned one Registered Agent Fee and one $300 annual Franchise Tax, rather than the separate taxes and fees that would otherwise be applied, individually, to separate LLCs.
The Delaware series LLC Operating Agreement (which is not required to be publicly filed) may provide for any number of series. The Certificate of Formation for a Delaware series LLC must specifically note, however, that the LLC is divided into distinct series and the assets and obligations of a series are attributable only to that series.
Additional series can be added, or series can be terminated, at any time by an amendment of the series LLC Operating Agreement. In order to maintain the legal distinction among the series, a series LLC must maintain records documenting the assets and liabilities of each series; however, from a practical perspective, records should be kept as though each series is a separate entity.
Although series LLCs have become increasingly popular, there is a certain degree of uncertainty surrounding the Delaware series LLC. For example, the legal separation of the assets and liabilities of each series has not been tested in court.
Although Delaware law clearly provides for legal separation of each series, it is unclear whether courts in other states and/or jurisdictions would recognize a legal separation of assets and liabilities within what is, technically, a single entity.
Therefore, even if a Delaware series LLC were properly structured and operated, with distinct records relating to the assets and liabilities of each series, a court in another jurisdiction could decide not to recognize the legal separation afforded under Delaware law.
Additionally, the United States federal tax treatment afforded to individual series is not certain.
In January 2008, the Internal Revenue Service held that the distinct series within a Delaware series LLC will generally be taxed as separate entities for federal income tax purposes; however, many states have not provided concrete guidance on the effect of the series distinction for state tax purposes.
We have been creating Delaware series LLCs for the last 10 years, and possesses the experience to allow you to take advantage of this flexible and efficient business formation. If you think the Delaware series LLC may be right for you, please call 800-345-2677 or email us for more details.
We can also offer guidance if you need help creating a series LLC Operating Agreement. We also offer a series LLC Operating Agreement template.
For more information on the Delaware series LLC, please read these helpful articles:
An LLC Operating Agreement expresses the fundamental understanding among its members of the how the company will operate as well as the members’ respective rights and obligations, including such issues as voting, ownership and management rights.
The Operating Agreement is to an LLC what the bylaws (and shareholders agreement) is to a corporation. The most important question that should be addressed in an Operating Agreement is: What is the relationship involved?
An Operating Agreement between two equal partners, both of whom will be involved in the day-to-day operations of the LLC, will look very different from that of a company with one founder providing sweat equity or an LLC with multiple financial backers.
Classes of Interests
For various business, legal or tax reasons, LLCs may issue classes of LLC interests. Different classes may have differing rights with regard to any aspect of an LLC’s business or operations, including economic rights, voting rights and rights to distributions from the company.
Economic Rights & Distributions
The Operating Agreement may set forth how economic profits and losses are allocated among the members and how and when distributions will be made. The amount and timing of distributions can be set at management's discretion, required at established times or triggered by certain events. LLC Operating Agreements sometimes include both required and discretionary distributions.
The Operating Agreement may set forth how the LLC is managed. An LLC can be managed by one or more members; by a board of persons (composed of members and/or non-members); or by one or more appointed managers. Generally, management is responsible for strategic decisions and the day-to-day running of the business, subject to any predefined limitations.
Management-related provisions commonly found in an LLC Operating Agreement include:
Parties in an LLC Operating Agreement can waive or otherwise modify the traditional fiduciary duties of care and loyalty that may otherwise be imposed by default, as opposed to in a corporation. The practical effect of fiduciary duties is the subject of a significant body of case law, and language in an LLC Operating Agreement can be a primary determinant of the outcome of litigation among members of the LLC.
Raising Additional Capital & Admitting Additional Members
An LLC may require additional working capital in the future. The procedures for raising supplemental funds (either from existing members or by accepting new investors) are generally spelled out in the Operating Agreement.
Transfer of Interest or Withdrawal from LLC
An LLC Operating Agreement often describes when, and under what conditions, a member may transfer his/her interest in the LLC, including for estate planning purposes. Similarly, the Operating Agreement may set forth the process and permitted circumstances under which a member may withdraw from the LLC prior to its dissolution; however, such a withdrawal, if permitted, is frequently subject to significant conditions and limitations.
Often, a permitted transfer or withdrawal will trigger a right of first refusal, permitting the other members to acquire the interest at issue on such terms as are set forth in the Operating Agreement.
An LLC Operating Agreement often states the events or votes which will trigger the winding up and dissolution of the company, and typically details how any LLC assets will be distributed after the discharge of all its liabilities
Since the LLC Operating Agreement is the governing document in regard to how the LLC is owned, operated and maintained, it is a good idea to make sure it covers all matters that could come up throughout the life of the company.
As the LLC grows and adapts, so, too, can the LLC Operating Agreement. It can be changed or modified to suit the LLC’s growing or changing needs. Since the LLC Operating Agreement is not on file with the state of Delaware and therefore not part of the public record, it can be internally changed or altered at any time during the life of the LLC.
THE ABOVE ARTICLE IS NOT LEGAL ADVICE AND SHOULD NOT BE CONSTRUED AS LEGAL ADVICE. IT IS A GENERAL DESCRIPTION OF SEVERAL, BUT NOT ALL, ITEMS TO CONSIDER WHEN ASSESSING YOUR COMPANY’S OPERATING AGREEMENT. IT IS NOT AN ATTEMPT TO LIST ALL CONSIDERATIONS THAT MIGHT BE ADVISABLE BY AN ATTORNEY FAMILIAR WITH DELAWARE LLC LAW. IF YOU REQUIRE LEGAL ADVICE WE RECOMMEND THAT YOU ENGAGE THE SERVICES OF A LICENSED ATTORNEY.
In a series LLC, owners need only form one LLC; they can then establish any number of separate series internally, without any additional expenses for the creation of an these individual series.
Regardless of how many entities are contained in your Delaware series LLC, there is just one Delaware Registered Agent Fee and just one Delaware annual Franchise Tax payment of $300.
Each series can hold its own assets, have its own members, conduct its own operations and pursue different business objectives, yet all of the series remain insulated from claims of members, creditors or litigants pursuing assets or asserting claims against any of the other series.
The structure, which has been likened to a piece of honeycomb, has existed for years, but there are still some unknown factors about the Delaware series LLC. The legal separation of the assets and liabilities of each series has not been tested in court.
The United States federal tax treatment afforded to individual series is still uncertain as well. Even though Delaware law clearly provides for the legal separation of each series, it is unclear whether courts and/or jurisdictions in other states would recognize a legal separation of liabilities and assets within what is essentially a single entity.
In addition, other states have not provided concrete guidance on the effect of the series' distinction in regard to state taxes. Furthermore, many banks are not familiar with the series LLC structure and have difficulty comprehending that each series can open up its own bank account.
This is often the biggest hurdle for business owners, as most banks just do not understand the Delaware LLC structure and thus do not know how to open separate bank accounts for each series contained in a single LLC.
Should the owners of a series LLC need to seek council or tax advice, it may be difficult, as many attorneys and accountants are still unfamiliar with the structure and therefore cannot provide competent assistance. Regulations on the taxation of the series LLC were proposed back in 2010; however, there is still minimal guidance on how these entities are to be taxed.
Due to the uncertainty of these issues, some people opt to form their new LLC as a series LLC but simply hold off on using the individual series until the myriad issues mentioned above are clarified, and attorneys, accountants and other states become more familiar with the unique structure of the Delaware series LLC.
This way, the series LLC is ready to be utilized in the future and it will not be necessary to amend the Certificate of Formation to allow for the series LLC structure.
The Delaware Corporate Law structure does not impose restrictions on foreign ownership or management.
It also does not require a Delaware LLC to maintain any physical presence in the state of Delaware other than a Registered Office and Registered Agent.
The only document required in order to create an LLC in Delaware is the Certificate of Formation. Unlike other states, Delaware requires very little information to be made public in order to form an LLC.
The Certificate of Formation, which is filed with the Delaware Secretary of State, has to contain only two articles: the name of the Delaware LLC and then the name and address of the Delaware LLC's Registered Office and Registered Agent in Delaware.
In Delaware, members and managers of an LLC are not required to be named on the Certificate of Formation.
Preparation, execution and filing of the Certificate of Formation must be handled by an authorized person or entity; an authorized person is an individual or entity that forms an LLC on behalf of the members by filing the necessary formation documents with the Secretary of State and returning them to the members.
Typically, the authorized person is the LLC’s Registered Agent or an attorney. Once this document is filed, the authorized person releases the LLC to the initial member(s).
The legal instrument that releases the LLC to the initial member(s) is called the Statement of the Authorized Person; this statement is prepared and signed by the Registered Agent, and it is not provided to the state of Delaware.
This information is not required to be filed publicly in Delaware.
Why would someone from outside the United States form a company in Delaware? There are numerous advantages to non-residents of the U.S.A. who form companies in Delaware.
When all of an LLC's income is Non-United States Source Income (as defined by the IRS), the members of the LLC who are not residents of the U.S.A. are typically not subject to U.S. federal income taxation.
U.S. non-residents can take advantage of Delaware’s freedom of contract and strong U.S. legal infrastructure without having to provide any member information on the public record; they can also operate their LLC anywhere in the world.
For help determining if your company earns U.S. source income, view the helpful Summary of Source Rules for Income of Nonresident Aliens provided by the IRS.
For more information or questions regarding U.S. company formations for non-residents, please feel free to call us at 1-800-345-CORP.