In order for a business owner or prospective business owner to form a limited liability partnership in Delaware, they will have to understand the commercial and business state laws. This is because the laws concerning the formation of limited liability partnerships (“LLPs”) in Delaware will be found under Title 6 of the Delaware Code that concerns commerce and trade.
One of the first decisions that a business owner must make when forming their company is to determine what type of business structure they want to use when registering their business. A limited liability partnership is one type of business management structure that a business owner may utilize. There are also several different business formations to choose from, such as a corporation, a limited liability company (“LLC”), a limited partnership (“LP”), or a general partnership.
The specific business structure that a business owner selects will significantly impact the future of their company, including matters such as:
- The amount of funds that the business or partnership can receive from investors;
- How many people can sit on a board, if any;
- Who will be held responsible for liabilities or debts that are incurred by the business or partnership; and
- How the business or partnership will be taxed.
Additionally, specific business formations also provide rules associated with how a company must operate. For example, in a limited partnership, there must be at least one partner who serves as a general partner to the entire partnership, and manages the business. Additionally, there must also be at least one or more limited partners in order for the business to exist as a valid limited partnership.
Importantly, limited partnerships and limited liability partnerships are not the same type of partnership. Once again, limited partnerships consist of one or more general partners with unlimited liability and limited partners with liability that is capped at their investment in the company. Limited partnerships also have fewer compliance requirements than that of a limited liability partnership.
Limited liability partnerships on the other hand offer limited liability protection for all partners involved in the partnership. This means that the limited liability partnership will shield all partners from the debts and actions of the partnership. However, there are some instances in which a partner’s action may cause them to be individually liable for their specific actions. Limited liability partnerships are also required to be registered with the state and adhere to state regulations.
What Paperwork Do I Need to Form a LLP?
Once again, a limited liability partnership is a partnership in which all of the partners are considered to be limited partners. Generally speaking, a limited partner can be held liable for the wrongful actions of the partnership, to the extent of their ownership share. However, in a limited liability partnership, every partner enjoys protection from all of the wrongful acts, debts, and/or obligations of the limited liability partnership.
To reiterate, the process for forming a limited liability partnership differs from state to state and prospective partners must adhere to specific state statutes in forming a limited liability partnership.
In order to form and register a limited liability partnership in Delaware specifically, the partners must first complete a Statement of Qualification. The Statement may be downloaded from the Delaware Government Division of Corporations webpage. Once all of the partners complete the form, they must file it with the Delaware Secretary of State.
This Statement of Qualification must include the following information:
- The name of the limited liability partnership;
- The registered office street address of the limited liability partnership;
- The name of the agent for service of process, who is the individual that receives legal documents from the Delaware Secretary of State.
- The registered agent must be a resident of Delaware;
- The business address of the agent for service of process, which must be the same as the registered office street address;
- The number of partners of the limited liability partnership as of the time that you complete the Statement of Qualification; and
- The date that the limited liability partnership begins, or a delayed date if it is different from the filing date.
Additionally, the state of Delaware requires creating a business partnership agreement. This agreement provides the rules for running the limited liability partnership, and must state that the partnership agreement is serving to form a limited liability partnership.
Additional requirements to form a Delaware limited liability partnership include:
- Two or more partners who are named in the business partnership agreement;
- The completion of a Statement of Qualification form;
- Registering the limited liability partnership with the Office of the Delaware Secretary of State;
- Maintaining a state-mandated amount of liability insurance; and
- Obtaining an Employer Identification Number (“EIN”) for tax purposes, even if the limited liability partnership does not have any employees.
What Benefits Does Delaware Give to a LLP?
There are many different benefits that Delaware provides to a LLP. First, all limited liability partnerships enjoy the benefit of “pass-through taxation,” which allows the limited liability partnership to pass its income tax obligations to the partners.
This means that the partners are responsible for the limited liability partnership income tax based on their respective shares in the business, and they report and pay the taxes on their personal tax returns.
According to Delaware business law, limited liability partnerships are also considered to be separate from their partners. As such, a limited partner who is involved in wrongful or negligent acts is held personally responsible for the acts.
However, a limited liability partnership protects the other partners from responsibility for those individual partner’s acts. Additionally, partners receive protection from the errors, legal fault, and negligence of the limited liability partnership.
What Disadvantages Does Delaware Give to a LLP?
Once again, the State of Delaware places certain obligations on a limited liability partnership in order for the partnership to continue operating. One such obligation is the requirement for the partnership to file an annual report with the Delaware Secretary of State every year, on June 1st, beginning the year after the Statement of Qualification (“SOQ”) of the limited liability partnership goes into effect.
It is important to note that if the partnership does not file their annual report, the state revokes their SOQ, which turns the limited liability partnership into a regular partnership.
The annual report must include the following information:
- The name of the limited liability partnership;
- The state in which the limited liability partnership was formed;
- The number of partners as of the date of filing the annual report; and
- The address of the registered office and agent.
It is also important to note that Delaware does not protect limited liability partners from all business liabilities. This means a limited partner may still be held personally liable if they:
- Engage in misconduct;
- Are negligent; and/or
- Personally guarantee a debt.
Thus, limited partners in a limited liability partnership, should seriously consider purchasing liability insurance in order to help offset their personal liability risk. Limited partners may also consider utilizing another business structure that offers more protections, such a limited liability corporation.
Additionally, when one of the partners dies, the limited liability partnership automatically ends. Although the other partners can start the business as a new limited liability partnership, the current limited liability partnership cannot continue.
Should I Hire a Lawyer?
If you are considering forming a limited liability partnership in Delaware, you should consult with an experienced Delaware corporate lawyer. An experienced business attorney can guide you through the process of forming a limited liability partnership and ensure that all requirements are fulfilled. Additionally, an attorney will also be able to represent you in court, as needed, should any legal issues arise involving the partnership.
