LLCs are an ideal solution for many business scenarios, such as real estate investments; family businesses; estate planning; intellectual property ownership; and government contracts or licenses.
However, there are a few potential drawbacks to be aware of before forming an LLC in Delaware. One such drawback is the untested structure and dual registration requirements.
Pass-through taxation
Pass-through taxation is a popular business structure. This allows profits from the business to be passed-through to owners’ individual income tax returns, which may be beneficial overall depending on their marginal personal tax rate.
However, there are some disadvantages to this tax structure. Business taxes may include franchise taxes, annual fees and self-employment (Social Security and Medicare) taxes.
Second, pass-through businesses do not benefit from limited liability protection from the federal government. This puts business owners’ personal assets at risk if someone sues their company.
Third, pass-through entities must pay state and local taxes on business profits as well as additional business taxes such as franchise or sales taxes.
Delaware offers many advantages to small business owners. One such advantage is that LLCs are immune from creditors’ lawsuits and can issue charging orders to safeguard members’ ownership interests. This means creditors will only pursue an LLC member’s ownership interest if the LLC presents them with a charging order.
Reverse shield
Delaware LLCs provide a two-way shield that shields owners’ personal assets from business liabilities, known as the reverse shield. This feature alone makes Delaware an excellent option for asset protection.
The Delaware corporate veil is nearly impenetrable, while its reverse shield offers some of the strongest protection in the country against hostile personal creditors attempting to foreclose on a single-member LLC’s assets or liquidate the company. This safeguard was established through section 3502 of the Delaware Code in 1871 as an aid to banks and trust companies as depositories of funds for debtors’ benefit.
In addition to the reverse shield, Delaware also offers several unique protections that make it a great choice for asset protection. These include:
Internal asset segregation
Internal asset segregation can be an effective tool to safeguard assets from the debts and liabilities of other LLC members. It prevents one LLC with a high liability risk from affecting all other business assets within the organization.
Delaware series LLCs allow companies to designate an unlimited number of protected series and insulate each one from the debts and liabilities of all other protected series in their LLC. This practice, known as internal asset segregation, can be a highly effective method for limiting liability in case of bankruptcy or foreclosing on one series.
This practice is similar to segregating duties, which involves assigning different tasks or responsibilities to different personnel within an organization. In the brokerage industry, this tactic is frequently employed in order to prevent customer assets from being mixed with the working capital of a firm. Portfolio managers often follow this method in order to guarantee client assets aren’t exposed to liabilities associated with one specific company.
Liability protection
Limited liability companies (LLCs) are business structures that grant owners legal rights and responsibilities separate from the LLC’s creditors. As such, an LLC can be an ideal choice for many small businesses as it provides protection from creditors while still giving management flexibility.
In Delaware, the only way for creditors to seize an LLC member’s ownership interest is through a charging order. This gives the creditor access to distributions from the LLC until their debt is paid off; however, it does not grant them ownership or control over the business.
Delaware LLCs are an ideal option for business owners who desire liability protection and flexibility in managing their company. However, it is essential to be familiar with the state’s laws and how they may apply to your business. If you have any queries regarding the formation process of an LLC, consult an experienced attorney for advice.
