Illinois vs. Delaware LLC

LLCs have been around for more than 20 years, and during that time the Uniform Limited Liability Company Act was introduced.  However, each state has their own set of statutes for LLC.  So which should you choose?  Illinois vs Delaware LLC?  While both are considered top choices for LLC, they have remarkably distinct approaches and views of an LLC.

Differences between the two are illustrated through an imaginary company to provide context to the reader.

Jack and Jill want to form an LLC.  Jill has the capital to invest.  Jack has the experience and expertise to run the business.  Now it’s simply a matter of deciding which state model to utilize.  Do they want to use Illinois, which follows a partnership ideal, where all parties are equal, by default, regardless of initial investment?  Would they prefer the Delaware model, which is more akin to a corporation?  Rights and ownership are determined according to the financial investments of each member.

It is not quite that simple though.  Jack and Jill must first determine the nature of their business, and how it would function in either state model.  Each bring powerful assets to their business, in different forms.  Their assets must be regarded in their decision as well.

An LLC clearly protects members of an organization.  While there are default regulations in each of the two state models, there is room for specific agreements among partners.  It is highly recommended that Jack and Jill take advantage of the liberty and get their detailed agreements in writing when they initially form their LLC.

Jack and Jill will need to consider how they want to control their business.  In Illinois, they’ll need to determine if they want a member-managed or a manager-managed organization.  Do they want to have agreement on every action taken in the business?  Then perhaps a member-managed business is the choice.  Does Jill want Jack to be able to handle routine decisions and make them without having to continuously consult her for her agreement?  Then manager-managed would be the preferred model.  They’ll need to decide which model works for their business and get that in writing.  By default, in Delaware, an LLC is member managed.

Several other questions and situations require consideration when forming an LLC.  Who will handle distributions and how?  Each state model has different requirements and defaults.  Jack, though he only contributed 10% of the finances to start the company, will run the daily operations, as his expertise and experience are his true investment.  How will he be compensated for his work?  What if Jill wants to leave the company?  How will this be handled?  What if Jack takes steps that could harm or even destroy the company?  How will Jill’s investment be protected?  A hard look at the good and the bad possibilities is required to ensure that Jack and Jill are protected in any scenario. 
While Illinois and Delaware share similarities in LLC statutes, they vary in their approach to partnership.  Jack and Jill must consider each detail to determine which model they will use.  However, they must look further than the basic regulations outlined in each model.  They need to determine how they want to run their business, and even how they would want to handle its dissolution. 

But regardless of either state’s laws, it is important to know that all of these answers could, and should, be put into writing in the form of an operating agreement.  The Operating Agreement is key in determining how the business will be run and how to deal with these, and many more, questions that may arise during the life of an LLC.

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