Some of my clients ask me whether there is an advantage to create an LLC Delaware. There may be benefits to a Delaware LLC, but the advantages are largely misunderstood. Delaware law specifically protects single member LLCs from collection remedies other than charging liens. Many people think that if they form a single member LLC in Delaware their interest would be exempt from a creditor foreclosure in a Florida proceeding.
Recent case law holds that a Florida debtor’s LLC interest is administered under Florida’s LLC law for purposes of judgment execution against the single-member LLC interest. A single member Delaware LLC interest held by a Florida debtor could be foreclosed just like an interest in a single member Florida LLC. Forming a Delaware single member LLC does not limit a Florida creditor to a charging lien remedy.
The legal advantage for a Delaware LLC is less obvious. Under Florida law an LLC manager owes a fiduciary duty to the members. In the event the LLC is insolvent the manager’s fiduciary duty extends to the LLC creditors. A Florida creditor could sue an LLC manager personally for breach of fiduciary duty if the manager takes action adverse to creditors. Examples of breach of duty to creditors include the manager’s dissipation of LLC assets or the distribution of LLC assets to members. In Florida, an LLC operating agreement may not eliminate the manager’s fiduciary duties.
Delaware’s LLC law permits maximum freedom of contract including the right of the LLC to contractually restrict in the operating agreement the fiduciary duties of the LLC manager. LLC. Delaware Code 18-1101 (e) says that an operating agreement my limit or eliminate any and all liability for breach of fiduciary duty.
A Florida LLC facing insolvency may consider converting to a Delaware LLC in order to protect the LLC managers from liability to LLC creditors or from unhappy LLC members in the event the LLC is sued by its creditors.
Most newly formed LLC’s actively doing business in Florid a should continue to organize in Florida because even if they form out of state they still have to register as a Florida LLC to conduct an active business. New LLC’s organized to hold passive investments, such as real estate, may protect their managers under Delaware law with a properly drafted LLC operating agreement.
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