The Delaware limited liability company (DLLC) is an increasingly popular alternative to the traditional corporation. The DLLC Act grants flexibility during both formation and operation of the entity, as well as numerous tax benefits.
An LLC may reorganize through merger or consolidation with another DLLC, as well as with an “other business entity” (including corporations, statutory trusts, common-law trusts, associations and partnerships formed or organized under Delaware or another jurisdiction’s laws). This versatility has become one of the primary reasons why DLLCs have become such popular structures for business ownership.
What is a put option?
In the world of finance and equity trading, a put option is an agreement to sell certain shares (or other assets) at a specified price within a specified time if certain events take place. This can be an incredibly useful tool for key employees who are motivated to purchase company stock at discounted prices during early stage startups.
Delaware LLCs are a legal entity with several advantages over other business entities. One of the most noteworthy is that an LLC enjoys freedom of contract, enabling its organizers to set terms tailored specifically for their requirements.
Furthermore, Delaware LLC legal principles provide its founders with considerable latitude in allocating rights and responsibilities among members. This can be accomplished through the drafting of an LLC Operating Agreement which clearly outlines each member’s specific rights and responsibilities.
However, there is the potential risk that such flexibility could allow an LLC to break the Delaware LLC act. For instance, a member could exercise his put right and force the LLC into insolvency – this was addressed recently in GMX Technologies, LLC v. Pegasus Capital Advisors, L.P.
When is a put option enforceable?
One of the primary advantages of forming a Delaware LLC is its additional asset protection against creditors. Since an LLC exists as its own legal entity separate from its members, owners are not personally liable for any business debts or judgments incurred.
Furthermore, the state’s exclusive “charging order” remedy prohibits creditors from taking action against a member that would force the sale of an LLC or voting interest in it. This helps safeguard the interests of members who take time to negotiate their operating agreements in advance.
A written LLC operating agreement, prepared by an experienced general business law attorney, is essential for any Delaware LLC. This document lays out the rules and structure of the business, helping to prevent future disputes.
Before beginning operations with your Delaware LLC, it’s wise to create a comprehensive business plan that outlines the products and services your business will offer, target customer profiles, marketing strategy, logistics plan, and finances. Furthermore, you may require purchasing insurance as well as renting space for your enterprise.
Can a put option be rescinded?
A put option allows a member to sell her interest back to the LLC at an agreed-upon price. This can be an advantageous tool when exiting a limited liability company, since it gives them the power to cash out without selling shares directly.
What happens if a member decides to exercise her put option? Can the company revoke it?
The answer to this question is more complex than one might expect. Under Delaware law, an LLC must distribute its assets to members, creditors, and other stakeholders in order to satisfy its liabilities.
According to Section 18 607 of the Delaware LLC act, an LLC member who knows at the time she receives a distribution that it will leave the company insolvent is personally liable for that amount.
What if the LLC is insolvent?
Generally, creditors cannot seize the personal assets of an LLC or corporation’s owners. This is because corporations and LLCs exist as separate legal entities that operate independently from their owners. Nonetheless, even these entities can encounter debt issues.
Fortunately, there are several steps you can take if your company is insolvent. Dissolving the LLC is one of the best methods for settling any outstanding liabilities.
Additionally, this will guarantee any remaining creditors receive notice that the company has stopped incurring additional debts. Furthermore, it will protect the business from incurring further obligations should it decide to relaunch operations.
When a corporation or LLC dissolves, its assets are distributed according to creditors’ claims in accordance with the Revised Uniform Limited Liability Company Act.
Creditors are paid first, and any remaining assets are distributed among members or shareholders according to their percentage ownership in the LLC. Generally, this distribution is reported to the IRS.
