CHOOSING YOUR DELAWARE BUSINESS ENTITY
Types of Delaware Business Entities
The simplest form of business enterprise is a sole proprietorship. The business is conducted by an individual after obtaining the necessary licenses, permits and other documents necessary to commence business. If conducted under a trade name, a “fictitious name filing” is required to notify the public of the use of a trade name by the sole proprietor. Because there are no formation or operational formalities, a sole proprietorship is very simple to start, operate and to terminate. A sole proprietorship does not involve the creation of a legal entity separate from the proprietor. As a result, the sole proprietor is personally liable for all debts and obligations of the business and there is no continuity of business in the event of disability or death. The only way to transfer ownership of the business is through a sale of the assets used in the business.
Probably the most commonly used and best understood form of business entity, a corporation is an entity formed under state or federal law. It is separate and distinct from its owners, and may acquire, hold, and dispose of property, conduct its business, and sue or be sued in its own name. The relative rights and duties of the corporation, its owners, and its management are largely defined by statute and by the corporation’s certificate of incorporation and bylaws.
Most corporations are organized as stock Corporations and issue stock to evidence ownership. Under appropriate circumstances, a corporation may be formed as a nonstock, membership corporation. Stockholders in small corporations often chose to enter into a stockholders’ agreement to regulate the voting and transfer of stock in order to better protect their investment.
As a separate entity, a corporation is liable for its debts and other obligations. Except under unusual circumstances, stockholders, directors and officers of a corporation are not personally liable for the corporation’s obligations.
Management of a corporation generally rests with its board of directors, who are elected by the stockholders. Other than the right to elect directors and approve certain transactions, such as mergers, sale of all assets, and dissolution, stockholders have no role in managing a corporation. When formed as a statutory “close corporation,” management may be vested in the stockholders in lieu of a board of directors.
Have no minimum capital requirement
Do not require a principal place of business in Delaware
Allow one person to be the sole director, officer and stockholder
Have no residency requirement for directors, officers or stockholders
A special type of corporation, known as the “professional corporation,” exists for licensed professionals, such as doctors, architects, accountants, and attorneys, who by law or ethical rules may not practice in the form of a regular corporation. The salient features of the professional corporation are that only licensed professionals may be stockholders, each stockholder participates as a director in the management of the business, and each stockholder remains personally liable for his or her own professional negligence or malpractice and that of any other stockholder, employee or agent working under the stockholder’s supervision and control.
A general partnership is simply an association of two or more persons to carry on a business as co-owners. No formalities are required to create a general partnership. Thus, a general partnership may arise out of the conduct and actions of the parties, or pursuant to an oral agreement. It is prudent, however, to use a written agreement that specifies the respective rights and duties of the partners. Where no agreement exists, the Revised Uniform Partnership Act provides some rules for the creation, operation, dissolution and termination of a general partnership, but it is not a good substitute for an agreement.
The distinguishing features of a general partnership are that each partner is an agent for the partnership with the power to legally bind the partnership and each partner is personally liable for the debts and obligations of the partnership. Most business decisions may be made by a majority of the partners, although some matters, such as admission of a new partner, will require unanimous agreement.
For non-tax purposes, a Delaware general partnership is a separate entity from its partners, may conduct business, acquire, hold, and dispose of property, and sue and be sued in its name, without the need to join all partners as parties.
Delaware authorizes a special form of general partnership known as a limited liability partnership. In a limited liability partnership, the partnership is required to register with the Delaware Secretary of State and maintain a specified amount of liability insurance. In return, partners are relieved of personal liability for obligations of the partnership. Partners remain personally liable for their own negligence or misconduct and that of persons under their direct supervision and control. The limited liability partnership is attractive to professionals who want the benefits of the partnership form but without the personal liability for the professional misconduct of other partners and employees.
A limited partnership is a special form of partnership created by the filing of a certificate of limited partnership with the Delaware Secretary of State pursuant to statutory requirements. The relation among partners is governed primarily by a partnership agreement. While the agreement may be oral, use of a written agreement is almost always advisable. The Revised Uniform Limited Partnership Act provides some rules regulating the relative rights of partners and the management, dissolution and termination of a limited partnership. Because such statutory rules may, in most cases, be altered by agreement among the partners, to obtain maximum benefits from the limited partnership form requires a written partnership agreement tailored to specific circumstances.
Like a corporation, a limited partnership is a separate legal entity from its partners. A limited partnership must have at least one general partner and at least one limited partner. The principal distinguishing feature of a limited partnership is that the limited partners are not personally liable for the debts and obligations of the partnership. The general partner remains fully liable. Thus, limited partners risk only their invested capital.
Historically, the price for limited liability was that limited partners could have no participation in management of the partnership, which was vested entirely in the general partner. Delaware’s current limited partnership laws provide great flexibility in this area, however, and it is possible to structure a limited partnership agreement that gives considerable management participation to limited partners without jeopardizing their limited liability.
Without loss of limited liability, limited partners may:
Transact business with the limited partnership
Be a control person of a general partner
Consult with and advise the general partner
Serve on a committee of limited partners
Vote on matters such as dissolution, a sale of assets, a merger, and admission or removal of a general partner
Limited partnerships may become limited liability limited partnerships, and thereby provide the general partner with the same protection from personal liability afforded general partners in a limited liability partnership.
A limited liability company is one of the more recent and most flexible business structures available in Delaware. Formed by filing a certificate of formation with the Delaware Secretary of State, a limited liability company is a separate legal entity having the power to conduct business, acquire, hold and dispose of property, and sue or be sued in its own name. A limited liability company may have as few as one member. Management may be by the members or by selected managers who may or may not be members themselves. As with limited partnerships, the relation among members and the management structure are typically set forth in a written limited liability company agreement. A limited liability company agreement may provide for various classes of members and managers and their respective rights, powers and duties and it may also set forth the manner of allocation of profits and losses of a limited liability company to its members. Principal attributes of a limited liability company include: (i) any member or manager may bind a limited liability company, (ii) except in certain limited situations, no member or manager is personally liable for the debts or obligations of a limited liability company, and (iii) perpetual existence. The foregoing may be changed by express provision in the limited liability company agreement.
A Delaware statutory trust, another extremely flexible business structure, is an unincorporated association created by a trust instrument and the filing with the Secretary of State of Delaware of a certificate of trust. A governing instrument, which includes the trust instrument, provides for the governance of the statutory trust and the conduct of its business. A governing instrument may provide for various classes of trustees and beneficial owners and define their respective rights, powers, and duties. A statutory trust has perpetual existence. It is managed by one or more named trustees who are not liable for the obligations of the statutory trust. The beneficial owners have the same insulation from liability as shareholders of a corporation, have an undivided beneficial interest in the statutory trust’s property, and have no interest in specific statutory trust property. However, the governing instrument may alter any of these attributes. In most cases, at least one trustee must be either a Delaware resident or have a principal place of business in Delaware.
From a strict legal view, a joint venture is simply a general partnership formed to pursue a single business venture that is limited in scope and duration. Today, however, the term joint venture is commonly used to describe a business venture undertaken by two or more existing businesses seeking to combine their resources to exploit a particular aspect of their respective businesses. Such a joint venture may take any form except that of a sole proprietorship, and commonly is organized as a corporation, partnership, limited partnership or limited liability company.