While the state of Delaware creates rules that Delaware entities have to follow, all Delaware entities have some flexibility to create rules for themselves (though some, like LLCs, have more than others, like corporations). They create those rules in “governing documents.” What those are depends on what kind of entity it is.
Let’s start with the classic business entity, the corporation. It typically has two core governing documents: (1) a “certificate of incorporation” (also called a “charter”); and (2) a “bylaws”.
The certificate of incorporation must be filed with the Delaware Division of Corporations (so it is “public” in the sense that anyone who wants to pay for a copy can get one). This is a short document that must contain certain basic information or rules about the corporation, including certain details about the corporation’s stock and the name of the person forming the corporation. It can also contain other rules, like eliminating directors’ liability to pay money for breaches of the fiduciary duty of care (we’ll talk about fiduciary duties in another post) or requiring the corporation to pay directors’ legal fees if they get sued.
The corporation can also have bylaws. This is typically a longer document that contains more detailed rules, such as the procedures for its annual stockholder meetings and its board meetings, how stock is issued and transferred, and the duties of its officers. If there is a conflict between the bylaws and the charter, the charter wins.
An LLC does not really have anything like a charter. Rather, it is only required to file a “certificate of formation” with the Division of Corporations, which only needs to include its name and registered agent. LLCs are sometimes preferred because of this additional privacy.
The primary governing document for an LLC is an “operating agreement” or “LLC agreement,” which basically serves as the LLC’s charter and bylaws all rolled up in one. It is even more important because an LLC has much greater flexibility than a corporation to create its own rules.
There are many sample charters, bylaws, and LLC agreements on the internet. But beware! It can be very complicated to create business rules that work with existing law and to anticipate and provide for potential emergencies or disagreements. If you are going to use a form, think very carefully about how you want the business to function and carefully edit the form accordingly. But usually it is far better to hire a lawyer with business governance experience to draft the documents. Once a lawsuit is filed it is too late to make rules that would have prevented it. As Benjamin Franklin once said, “an Ounce of Prevention is worth a Pound of Cure.”
Filed under: Basic Law of Corporations
Delaware Corporate Law Update 