Delaware has long been the premier state of formation for a variety of businesses and today, more than one million entities have made it their home. There are many factors that have helped build Delaware’s reputation as a preeminent jurisdiction for entity formation. Its flexible legal and regulatory framework ensures entity laws are continually updated so that legislation remains state-of-the-art, addressing market concerns as they develop. In addition, Delaware boasts a well respected and sophisticated judicial system and responsive and engaged government that strives to remain technologically advanced and customer-service oriented.
As a result of this business-friendly environment, Delaware has enjoyed a steady increase in the number and sophistication of investment funds and asset finance vehicles formed under its law. Some of the Delaware entities most commonly used include:
Delaware Limited Partnership ("LP")
A Delaware LP is a separate legal entity that must have at least one general partner and at least one limited partner. The general partners control the day-to-day operations of the business while limited partners, as investors, are not permitted to participate extensively in the day-to-day management. The distinguishing feature of an LP is that the limited partners are not personally liable for the debts and obligations of the partnership while general partners have unlimited personal liability. An LP is intended to be a flexible structure whose terms can be tailored to the needs of a specific business. From a more practical perspective, LPs provides investors with pass-through tax treatment.
Delaware Limited Liability Company ("LLC")
The Delaware LLC was created by the Delaware legislature and is a separate legal entity meant to provide the flexibility of a partnership while providing an added layer of 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. The LLC also offers the flexibility and pass-through tax treatment that are characteristic of an LP.
Delaware Statutory Trust
Common law trusts, though often still used, have many outdated rules which can create uncertainty about a number of legal aspects of the trust. Delaware has undertaken the task of modernizing the common law and creating an effective and judicially secure form of entity and is one of a few states in the US to have a statutory trust law that allows for the formation of a Delaware statutory trust. A statutory trust is a separate legally recognized entity that is set up to be used for asset securitizations and other structured finance transactions. Generally, the entity has two types of participants—trustees and beneficial owners. The trustee is obligated to follow the terms of the trust agreement in managing these assets but the trust itself owns the assets. The beneficial owners hold equitable ownership and they, too, are governed by the terms of the trust agreement as to their ability to manage, control or utilize the trust. The Delaware statutory trust offers protection to its trustees, managers and beneficial owners who are not liable for its obligations. Statutory trusts also boast flexible tax treatment with no franchise tax and no Delaware income tax.
Delaware continues to remain on the cutting edge of evolving and improving its legal framework and is expected to retain its reputation as a jurisdiction of choice for investment funds and structured finance vehicles. In addition, Delaware boasts and established network of service providers who can support clients in fulfilling the necessary administrative and operational requirements.