Should I form my LLC in Delaware and get a Delaware LLC Operating Agreement?
While a LLC is very flexible in nature and has broad possibilities in its structure, operation, management, as well as other areas, each state has certain mandatory provisions and default provisions. Mandatory provisions are those rules that must be complied with and default provisions are rules that take effect if the LLC’s Certificate of Formation or Operating Agreement do not address.
Since all fifty states and the District of Columbia have LLC statutes, most businesses can be organized as a LLC in any of those jurisdictions, but laws governing LLCs can vary by location. In deciding where one should form a LLC, one should consider factors such as the formation cost, state tax laws and business laws, and whether it will be necessary for the LLC to qualify/register to conduct business in one or more other states. Forming a LLC in a state different from where the LLC will operate is permissible since every state will recognize a foreign LLC (a LLC formed in another state) and will allow the LLC to conduct business within the state. However, each state will typically require the foreign LLC to register (generally by filing an application for certification of authority), maintain a registered agent, and pay certain fees.
The state of Delaware is the most commonly selected state for LLC formation largely because it has favorable LLC laws and has a considerable amount of case law regarding LLCs. As a result, many hedge funds and private equity funds will form Delaware LLCs even though the business they will be investing in will be located in another state. This is largely a result of the comfort many institutional investors have with Delaware as a result of the amount of established case law in the area.
However, organizing in a state different from where the LLC will operate could lead to additional problems and costs. Typically, additional organizational and registration costs and fees will apply. For example, if a LLC operates a business in the state of Colorado but was organized in the state of Delaware, the LLC will incur dual costs (formation costs in Delaware and the cost of qualifying the LLC to do business in Colorado). Since all fifty states and the District of Columbia have LLC statutes and the LLC Operating Agreement can dictate how the LLC will be managed, it is more efficient to form a LLC in the state where the LLC main business operations will be located. Generally, other than large hedge funds, investment funds, private equity funds, or companies operating in most of the 50 states, it is far more efficient to form your LLC in the state where you will be conducting the largest portion of your business.
