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Variance In Entity Formation And Exculpatory Clauses

1934 words - 8 pages

RESEARCH SECTION:

The complicated business and legal environment in the global market that exists today

requires careful analysis of all aspects of the potential business/investment. For a

potential business owner, simply choosing which ownership entity requires both legal

advice and tax advice to ensure you are not opening your company up to unnecessary

liability or negative tax implications. The unique characteristics inherent with LLC's,

corporations, partnerships and the like can drastically affect your flexibility and structure

moving forward. The subsequent formation of contracts, managers, etc. also involves a

significant amount of work and time; and is the focus of this research paper. The intent of

this report is to explain and offer an opinion on the disparity between entity formations

and the protection they provide (specifically LLC's) among different states in the United

States. In addition, I will analyze and provide my own input on the varying fiduciary

responsibilities of managers to the related LLC depending on which state the LLC is

incorporated in (including the allowance of an exculpatory clause and its effectiveness

when challenged).

An LLC (limited liability company) is commonly utilized in today's business

environment for many different reasons1:

§ Very few restrictions compared with other ownership entities

§ All owners experience “limited liability” which separates the individual owner's

personal assets from the LLC's assets
3

Ø Partnerships are required to have a managing/general partner

who is not protected by this provision

Ø LLC's can have managing members; and depending on how the contract is

written, can be personally liable for the direction and actions of the LLC

§ The income is “passed-through” to the individual owners

Ø This means the income is only taxed once (at the individual owner's

personal income tax rate)

The general points stated above are the main reasons in which someone would choose to

create an LLC, however; each state's regulations on the characteristics and protection

offered by these LLC's are different. Here is one startling statistic that shows which state

is most preferred by business owners2:

“More than 850,000 business entities have their legal home in Delaware including

more than 50 percent of all U.S. publicly-traded companies and 63 percent of

Fortune 500 companies.”

The state of Delaware provides a distinct advantage to the business entity and as a result

the overwhelming majority of large businesses choose to incorporate in the respective

state. A few of the reasons for this include3:
4

flexible business formation statute in the United States

Ø Under the Delaware Limited Liability Company Act (the “Delaware Act”)

the operating agreement may expand or restrict a member, manager, or

other person's...

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