Limited Liability Agreements in Delaware
Delaware law authorizes business owners to form a limited liability company, or LLC, to operate their business. An important part of forming the LLC is making a limited liability company agreement. Delaware law allows LLC owners -- called members -- to use the limited liability company agreement to structure company management and specify the rights and obligations of the members in a manner that best suits their needs.
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Delaware LLC Agreement Basics
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A limited liability company agreement is defined under Delaware law as any agreement "written, oral or implied" between the members regarding the affairs of the LLC. The LLC is not required to sign the agreement, but will be bound by its provisions. The same is true for LLC members and managers. A limited liability company agreement is enforceable even if the LLC has only one member.
LLC Management
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Delaware LLC law states that company management is vested in each member in proportion to the member's percentage ownership interest in the LLC -- unless a limited liability company agreement states otherwise. This gives the members several options for structuring company management in an agreement. For example, one or more members can be designated manager with authority for running daily business operations, which is particularly useful if some members intend to be investors only. If a special business expertise is required to run the company that none of the members possess, a non-member with the necessary qualifications can be hired as manager. In these situations, a properly prepared limited liability company agreement is a useful guide for the members and managers on how company operations and decision-making are to be handled.
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Profits and Losses
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Similar to the default management provisions of Delaware LLC law, the default provisions for allocation of profits and losses are subject to alteration by an LLC agreement. In the absence of the agreement, Delaware law requires that the profits and losses be allocated according to the value of each member's capital contribution. A significant benefit to forming a Delaware LLC is the ability to alter this requirement to suit the members' personal needs. For example, a member whose contribution largely consists of business expertise and provides daily management service to the company may desire a regular salary. The member whose contribution makes up the majority of the working capital for the LLC may desire a greater share of the LLC's early losses and can await payment of future profits. In this situation, the members can use an LLC agreement to structure the profit and loss allocation so that the investor-member receives most of the profits and losses, and in exchange the member-manager receives a regular salary.
Planning for Dissolution or Member Withdrawal
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Delaware LLC law permits the members to state in an LLC agreement the conditions or events for dissolving the LLC. Without such an agreement, the consent of all members of the LLC is required for dissolution in most cases; if there is more than one class of membership, then by two-thirds of each class. Either of these situations may prove unworkable if the members are evenly split on the issue of dissolution -- which will most likely lead to a lawsuit. To avoid a costly controversy, the members should specify in an LLC agreement events that require dissolution of the company, such as its business purpose no longer existing. The agreement could also provide for an economically viable way to buy out members who insist on dissolving the LLC when other members want to continue with the company.
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References
- Delaware Code: Limited Liability Company Act § 18-101. Definitions
- Masuda Funai: Is a Limited Liability Company Bound by its Own Operating Agreement?
- Delaware Code: Limited Liability Company Act § 18-402. Management of limited liability company.
- Delaware Code: Limited Liability Company Act § 18-503. Allocation of profits and losses
- Delaware Code: Limited Liability Company Act § 18-801. Dissolution
