Delaware Corporate Law Update

Updates on Delaware Corporate Law by Evan O. Williford, Esq., Delaware Corporate Litigation Attorney.

Types of Delaware Business Entities and Limited Liability

The most well-known business entity, of course, is the corporation.  There are many others, however, such as limited liability companies (“LLCs”).  Each one has its own characteristics.  Which should a business owner choose?  That depends on their circumstances.

The corporation has a well-defined structure that most people dealing with it will be familiar with.  Its day-to-day business is run by certain key people called “officers.”  The officers themselves are hired, fired, and supervised by “directors,” who sit on what is known as a “board of directors.”  And the corporation itself is owned by “stockholders,” who can in turn elect the directors.

Another popular entity form is the LLC.  One of the big advantages of the LLC over a corporation is that it is possible to greatly customize how that LLC is structured, far beyond what is possible with a corporation.  With great freedom comes great responsibility, however.  Those forming an LLC should make sure that its structure, typically specified in detail in a document called an “LLC Agreement,” matches what is needed for the business.

Another consideration for those forming a business entity is taxation.  Some entities may elect with the U.S. Internal Revenue Service to pass income through to their owners, such as “S Corporations,” while others are taxed twice, once at the entity level and again at the owner level.  Those considering this issue should consult their accountants as to which tax treatment is best for them and what business forms qualify.

A key feature of many business forms is “limited liability.”  That means business owners are not generally liable for the business’s debts.  Thus their “liability” has been “limited”.  This was an important historical reason behind the rise in popularity of the corporation.  Investors wanted the ability to take risks by investing their money into a business without the possibility that if the business failed its creditors might go after them.

To form a Delaware business entity like a corporation or LLC, one needs to file the appropriate forms with the Delaware Division of Corporations, as will be discussed in another post.  But what happens if a business is run without creating a legal business entity?  The answer depends upon the state the business is operating in, but one possible result is the formation of a “sole proprietorship” or “general partnership”.  Such entities typically do not have limited liability.  That is one of many reasons it is important to properly form a business entity with a state like Delaware.

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Filed under: Basic Law of Corporations

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Disclaimer

Delaware Corporate Law Update solely reflect the views of Evan Williford of The Williford Firm, LLP. Its purpose is to provide general information concerning Delaware law; no representation is made about the accuracy of any information contained herein, and it may or may not be updated to reflect subsequent relevant events. This website is not intended to provide legal advice. It does not form any attorney-client relationship and it is not a substitute for one.