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A Delaware LLC is a business vehicle with a legal existence separate and distinct from its owners. Owners and managers are not personally liable for the company's debts and obligations.
A Delaware LLC has the ability to be treated as a pass-through entity for tax purposes. As such, it is considered a hybrid business formation that combines some of the best features of corporations and partnerships.
An LLC is a relatively new type of entity in the United States. If properly structured, it combines the limited liability of a corporation with the pass-through taxation of a partnership. However, it is important to clarify that while LLCs can be treated as legal partnerships, they are not corporations. Owners-or members, as they are called in an LLC structure - can be individuals or any type of entity, from anywhere in the world, and are unlimited in number.
The features of a Delaware limited liability company, when combined with non-U.S. source income, mean non-resident aliens of the United States can avoid U.S. taxation when using an LLC.
The Franchise Tax for a Delaware LLC or Delaware limited partnership (LP) is a flat annual rate of $300.
The operations and management of an LLC are governed by a written agreement, composed by its owners, called an LLC Operating Agreement. The Delaware Limited Liability Company Act allows the parties to define their operations, management and business relationship in the LLC Operating Agreement. This is a legal condition known as freedom of contract. The stated policy of the Delaware Limited Liability Company law is to allow for maximum effect on the principle of freedom of contract and thus only intervene when LLC members request legal mediation.
An LLC's Operating Agreement is not required to be publicly filed nor disclosed to the Delaware Secretary of State. As a result, a Delaware LLC guarantees privacy and confidentiality as well as the ability to create a customized management structure that establishes the economic relationship among owners. The LLC Operating Agreement can be written in any language and is typically not required to be translated into English.
While the Delaware LLC law permits a Delaware LLC to be managed by its members, it does not require members to be managers. More importantly, the Limited Liability Company Law also states that no member or manager is personally responsible for any debts, obligations or liabilities of the Delaware LLC solely by being a member or acting as a manager. This limitation on personal liability compares favorably with the limitation on personal liability enjoyed by shareholders of a Delaware corporation.
The contractual flexibility offered by the state of Delaware is unmatched by any other LLC statute in any other state.
By checking the appropriate box when applying for an Employer Identification Number (EIN), a Delaware LLC can be treated as a partnership for federal income tax purposes. This means the LLC will not be subject to United States federal income tax. This option is an attractive advantage for non-resident aliens of the U.S.
The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, startups and general business topics.
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