The Flexibility of LLCs

As mentioned in our previous blog post, "The Top 6 Things You Should Know About LLCs", Limited Liability Companies (LLCs) afford founders and investors with much more flexibility in establishing their business and legal arrangements. While Delaware corporations are largely restricted by the fairly rigid requirements of the Delaware corporate statute, Delaware LLCs are much more of a “creature of contract” where the default rules under the LLC statute can largely be overridden by the provisions of the governing LLC operating agreement.

A few examples are:

  • The Delaware corporate statute provides that the business and affairs of a corporation are generally managed by a Board of Directors. LLCs may be managed by a Board of Directors or Managers or by its Members without a Board of Directors or Managers
  • LLCs have more flexibility around certain corporate formalities that are applicable to corporations, such as the requirement to have annual shareholder meetings, etc.
  • The Directors of a Delaware corporation are subject to fiduciary duties, including the duty of care and the duty of loyalty. LLCs have the flexibility to “opt out” of subjecting their Managers or Directors to these duties. However, it is important to note that the contractual duty of good faith and fair dealing cannot be waived.
  • With corporations, the economic split among owners and investors is generally based on relative share ownership (subject to any special rights of the preferred stock, such as accruing dividends or liquidation preferences). In contrast, with LLCs, the economic split may be based on unit ownership or some other metric – e.g., it is often possible to designate that a certain class or series of units is entitled to a certain fixed percentage of the economics, regardless of the number of units of that class or series that are outstanding. Accordingly, complicated business arrangements with differing economic splits at different outcomes, including “catch up” or “claw back” clauses can more readily be implemented in an LLC structure. However, it is important to note that there can be tax pitfalls in structuring these arrangements, so a tax advisor should always be consulted.

The tradeoff is that with this increased flexibility, there is often increased legal, tax and accounting costs. For this reason, the LLC offering on the Document Driver portion of the Founders Workbench is intended to be fairly straightforward, as it generally replicates the structural approach of our C corp. offering, while still facilitating the tax benefits associated with electing to organize as an LLC.

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