Clients often ask us to articulate the benefits and drawbacks of forming and operating a business as a limited liability company (abbreviated as LLC) as opposed to a limited partnership (abbreviated as LP). LLCs and limited partnerships share certain common features, however, they differ in a number of important ways. This posting describes some of the key similarities and differences.

LLCs and limited partnerships are similar in that they are, and were intended to be, flexible business forms. The terms governing an LLC or limited partnership’s operations can be tailored to the needs of a specific business. For instance, to provide only a few examples, investors in an LLC or limited partnership can provide for whatever voting or economic terms they desire, and can alter the standard of care and fiduciary duties which participants in the business owe to one another. Delaware law provides certain limited default terms that will govern in the event that the operating agreement of the entity is silent on an issue, but the LLC and limited partnership forms are each intended to give maximum effect to the participants’ freedom to contractually provide for terms they deem appropriate.

The LLC and limited partnership are also similar in a much more practical way: each provides its investors with pass-through tax treatment.  Pass-through tax treatment means that the business itself is not subject to federal income tax, but each investor will be required to report separately on its income tax return for each year its distributive share of items of the business’s income, gain, loss and deduction, and will be taxed currently on that distributive share, regardless of whether the investor has received or will receive a distribution of cash or other assets from the fund.

The most important difference between the LLC and limited partnership form relate to personal liability of participants.

A limited partnership is managed by one or more general partners that control the day-to-day operations of the business. These general partners have unlimited personal liability for the debts and obligations of the limited partnership, meaning that they can be held personally liable for those debts and obligations. A limited partner does not have personal liability for partnership obligations, but is not permitted to participate extensively in the day-to-day management of the limited partnership. If a limited partner participates in a significant way in management, a court may treat that limited partner as though it were a general partner if the limited partnership is sued, and impose personal liability upon the investor. To avoid this personal liability, an entity such as a corporation (or, as described below, an LLC) may serve as the general partner of a limited partnership. However, creating a separate entity to serve as general partner adds additional cost and complexity, and could have adverse tax consequences.

The LLC was created by the Delaware legislature to provide the flexibility of a partnership while providing corporation-like protection against personal liability. An LLC can be managed by one or more of its members. Unlike in a limited partnership, however, a participant engaged in the management of the business is not personally responsible for the liabilities of the entity.

Given the personal liability applied in a limited partnership, many clients ask why a person would choose the limited partnership form. As noted above, the LLC is a relatively new type of business form (since 1992) and, as a result, the case law regarding LLCs is far less robust and settled than that applicable to limited partnerships. The predictability that a settled body of case law provides leads some to select the limited partnership form. However, the LLC has gained a lot of ground in popularity. Last year,  67% of the State of Delaware’s new formations were LLC’s while around 6 % are LP’s.

To form a Limited Partnership or Limited Liability Company please call us at 800 345 2677 opt 1, we are here and ready to assist!

Delaware’s Secretary of State recently put out a report recapping the 2008 year as a whole for the Division of Corporations.

Some of the notable statistics are:

In Autumn 2008 there was one domestic entity per Delawarean

Delaware remained the chosen home of 64% of Fortune 500 companies

67% of the new formations were LLC’s

24% were Corporations

9% were either a LLP/LP or a Trust

121,628 new Delaware entities were created in 2008

40,154 less Delaware entities we’re created in 2008 versus 2007

882,000 active entities are in Delaware

Even with the decrease of over 40,000 entities from one year to another, Delaware Division of Corporations is still a driving force in generating income for the State of Delaware. Roughly 30% of the State of Delaware’s income as a whole comes from the Secretary of State Division of Corporations office.

Delaware is not immune to the economic downturn other states of the nation are facing. To combat a huge budget deficit, many of the fees associated with an amendment, renewal, Good Standing Certificate, Certified Copy, Apostille have gone up drastically. The late fee for all Delaware Franchise tax payments has increased from $100 to $200.

One thing that will not change is Delaware’s reputation for having the best corporate law structure in the nation!

To view the entire report click here: http://corp.delaware.gov/2008AR.pdf

To Inc. or not to Inc.? – that is the question. Or should I say – to Inc. myself, or have a lawyer or a professional service handle the task for me?  Logistically speaking, there are pros and cons to each and we shall examine them here.

At Harvard Business Services, we serve as a Delaware Registered Agent to more than 30,000 companies, most of which we’ve formed and filed on behalf of our clients. However, we also serve as Registered Agent to thousands of clients each year who undertake the filing themselves with little or no professional help – true “Self-Filers.”

The fact that we offer the lowest Annual Registered Fee in Delaware ($50 ) makes us very popular among both of these groups, and it’s even more convincing once you figure out the three-year cost of Harvard vs. other agents. At Harvard, we’ve been guaranteeing a fixed agent fee of $50 per year for almost 30 years. A lot of other agents start out at a low fee and then jack your rate up the second year and every year thereafter. Ask them about it if you’re comparing prices.

Obviously, those in the hands of a professional will have a greater level of confidence than those who are on their own. There’s nothing like knowing that a professional is taking care of everything for you, especially if this is your first time forming a company. But let’s look at three practical matters and compare self filing to using Harvard’s formation service: Cost, Speed and Completeness.

COST:
Self-Filers are incurring less expense through the process; since any professional will charge a fee for their expertise.  From our experience, filing through an attorney will typically range from $500 to $2,500. Harvard’s services start at $329 and go up to $599 for express overnight service. Filing yourself will cost you the filing fees ($90), the first year’s agent fee ($50 – $149), the cost of a corporate seal ($40) (some banks require them for opening an account) and any fed ex or mail service of filing the documents. Self-filers will prepare their own Certificate of Formation and make several phone calls to government offices before accomplishing the filing. Depending on how you value your time, you’ll save a couple of bucks by self filing.

SPEED:
Self-filers can expect the approval from the Delaware Division of Corporations within a two week period and receipt of their documents within 3 weeks, on the average.  Harvard files every company on a SAME DAY basis. You’ll have your filed scanned documents by email within two business days, and your seal will arrive about the same time. If you were to request same day filing service when self-filing, Delaware would be happy to provide it, for an extra $100. This extra fee would wipe out most of the cost savings of self-filing. So, if speed is a consideration, the costs are about the same.

COMPLETENESS:
Some banks, car dealers and real estate agents will require a company to use their seal on official documents and sales contracts. The Company Seal is the signature stamp for your company. You’ll need one sooner or later. A fair value for such an item is around $40 for a seal of comparable quality. Once you throw that in, you’re better off having Harvard handle everything for you.

For almost 30 years, Harvard has been filing corporations and LLCs for clients from all across the USA and all around the world. We know what’s needed to get the documents quickly through the approval process and we follow your documents electronically to make sure they don’t get delayed. If the self-filer makes a mistake in his documents the State will put a hold on the application and the client will be delayed or back at square one.

As a final thought, consider one other thing. One of the most popular reasons that clients file Delaware LLCs  is for the benefit of anonymity.  When we prepare and file your documents, we sign the certificate and your identity remains undisclosed. However, if you self-file, you will be required to offer your name and address for public record and forfeit anonymity.

So, when considering home repairs; DIY may save you $$$…but when considering the foundation of your new business….maybe not so much.  You usually get what you pay for.  At Harvard, you get so much more!