How Does a Delaware LLC Limit Liability?
A tax-friendly business environment makes Delaware a preferred destination for companies. Thus, many U.S. companies file their incorporation papers in Delaware but do business outside of the state. In general, operating as a registered LLC in Delaware provides protection for your personal assets.
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Limited Liability Company
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A limited liability company (LLC) is a hybrid business entity that combines the benefits of a corporation with that of a partnership. It is a legal business entity recognized in the United States. A LLC is comprised of members and the governing document is its articles of organization. The assets and liabilities of the LLC receive separate treatment and are kept apart from its members as in a corporation. A member receives a share of profits based on his pro-rata ownership portion, as in a partnership.
Advantages of a LLC
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A LLC has greater flexibility when filing its taxes. It can elect to file its taxes a corporation, partnership or sole proprietorship depending on the elections made by the LLC and the number of members. For example, a multi-member LLC can file as an S or C corporation or partnership. A single-member LLC can file as a corporation or sole proprietorship. Members are taxed on a personal income level if the LLC files as an S corporation, partnership or sole proprietorship. The LLC's profits are subject to double taxation if it files taxes as a C corporation.
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Disadvantages Of A LLC
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In Delaware, a LLC must pay an annual fee of $250. But, if the LLC does most of its business outside of Delaware, it must file and pay fees as a foreign LLC in the state in which the predominance of its operations occur. In general, raising capital for a LLC may be more difficult compared to a corporation that can issue shares. Attracting outside investors may be difficult. The LLC's operating agreement must provide guidelines for attracting outside members and set a valuation for new members' share of profits.
Personal Guarantee
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A personal guarantee is a promissory note asking a member of the LLC to be the ultimate payer if the LLC defaults. It is an industry-wide practice that is recognized and enforced even in a business-friendly state of Delaware. Lenders are more likely to ask LLC members to sign personal guarantees particularly for unsecured debt. The personal guarantee supersedes the veil of protection from LLC debt.
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