Limited liability companies: formation, operating agreements, management, member liability, and fiduciary duties (Delaware)

Black-letter propositions

1. 01

   To form a Delaware limited liability company one or more authorized persons must execute and file with the Secretary of State a certificate of formation stating the company's name and the address of its registered office and name of its registered agent.

2. 02

   A limited liability company is formed at the time of filing of the initial certificate of formation, or at a later date specified in it, if there has been substantial compliance, and it is a separate legal entity whose existence continues until cancellation of the certificate.

3. 03

   A limited liability company agreement is any agreement, whether called an operating agreement or otherwise, written, oral, or implied, of the member or members as to the affairs of the company and the conduct of its business, and a member or manager is bound by it whether or not he executes it.

4. 04

   An operating agreement may be entered into before, after, or at the time the certificate of formation is filed, it is not subject to any statute of frauds, and an agreement of a company with only one member is not unenforceable because there is only one party to it.

5. 05

   A person is admitted as a member at the formation of the company or at the time provided in and upon compliance with the agreement, or if the agreement does not so provide when the person's admission is reflected in the company's records, and a later member is admitted by the consent of all members unless the agreement provides otherwise.

6. 06

   Unless the operating agreement provides otherwise, management is vested in the members in proportion to their current percentage interest in profits, and the decision of members owning more than 50 percent of that interest controls, and if the agreement provides for a manager, management is vested in the manager to the extent provided.

7. 07

   Unless the operating agreement provides otherwise, each member and manager has authority to bind the limited liability company.

8. 08

   The debts, obligations, and liabilities of a limited liability company are solely the company's and no member or manager is personally obligated for them solely by reason of being a member or acting as a manager, though a member or manager may agree to be personally obligated.

9. 09

   The policy of the Delaware act is to give maximum effect to freedom of contract, and the operating agreement may expand, restrict, or eliminate a member's or manager's duties, including fiduciary duties, provided that it may not eliminate the implied contractual covenant of good faith and fair dealing.

10. 10

    A member or manager is fully protected in relying in good faith on the company's records and on information, opinions, reports, or statements presented by another member, manager, officer, employee, or committee, or by any other person as to matters the person reasonably believes are within that person's professional or expert competence.

Use this attack sequence under time

Common wrong turns

• A member is not personally liable for company debts merely because of being a member or manager.
• An oral operating agreement can be binding and is not subject to a statute of frauds.
• By default each member and manager may bind the company.
• The agreement may eliminate fiduciary duties but cannot eliminate the implied contractual covenant of good faith and fair dealing.

Worked example

Three friends form a Delaware limited liability company by filing a certificate of formation and agree orally that Ana holds 50 percent of the profits interest and each of the other two holds 25 percent. There is no manager provision. Ana and one friend vote to sign a lease that the third opposes.

Practice this topic

Formation and the operating agreement

Section 18-201 of the Delaware Limited Liability Company Act requires one or more authorized persons to execute a certificate of formation that is filed with the Secretary of State and sets out the company's name and the address of its registered office and name of its registered agent, provides that the company is formed at the time of the filing of the initial certificate if there has been substantial compliance, and provides that the company is a separate legal entity whose existence continues until cancellation of the certificate.

Section 18-101 defines the limited liability company agreement as any agreement, written, oral, or implied, of the member or members as to the affairs of the company and the conduct of its business, provides that members and managers are bound whether or not they sign it, and provides that it is not subject to any statute of frauds. Section 18-201(d) allows the agreement to be entered into before, after, or at the time of the filing of the certificate.

Membership, management, and liability

Section 18-301 provides that in connection with formation a person is admitted as a member at the later of formation or the time provided in the agreement or, if the agreement does not so provide, when admission is reflected in the records, and that after formation a person is admitted as provided in the agreement or, if it does not provide, on the consent of all members. Section 18-402 provides that unless the agreement provides otherwise management is vested in the members in proportion to their profits interests with more than 50 percent controlling, that management may be vested in a manager as the agreement provides, and that each member and manager has authority to bind the company.

Section 18-303 provides that the debts, obligations, and liabilities of the company are solely the company's and that no member or manager is obligated personally solely by reason of being a member or acting as a manager, while a member or manager may agree to be personally obligated.

Duties and reliance

Section 18-1101 states the policy of giving maximum effect to freedom of contract and provides that fiduciary duties of a member or manager may be expanded, restricted, or eliminated by the agreement, provided that the agreement may not eliminate the implied contractual covenant of good faith and fair dealing, and that liability for breach of contract and duties may be limited or eliminated except for a bad faith violation of that covenant. Section 18-406 fully protects a member or manager who relies in good faith on the company's records and on information and reports from other members, managers, officers, employees, committees, or experts on matters the person reasonably believes are within their competence.

Frequently asked questions