Corporate Law

Delaware’s Alternatives to Corporations

Delaware offers business solutions for managers and investors that go far beyond traditional stock corporations. Although the governing laws may differ, Delaware’s other advantages remain the same for these alternative entities excellent courts, a legislature willing to work with Delaware’s corporate bar, and a service-oriented Secretary of State’s Office. Thus, no matter which corporate form is chosen, all Delaware entities enjoy the best aspects of formation in Delaware.

Besides corporations, Delaware’s most popular business forms are limited partnerships (LPs) and limited liability companies (LLCs). The statutes governing both types of entities include a strong principle of freedom of contract, allowing managers and investors to reach the optimal solutions for the needs of both. A Delaware LP is formed by two or more persons, at least one general partner (charged with the management of the LP) and at least one limited partner (who benefits from a limitation on liability). The LP statute is largely an enabling statute with few mandatory provisions, allowing the parties to set the terms that will govern their relationships in their partnership agreement.

Delaware’s LLCs are very similar to LPs, except that LLCs may be managed either by the members themselves or by a manager. One key aspect of Delaware LPs and LLCs is that, in the governing agreements, the parties may modify or eliminate fiduciary duties and fiduciary liability if they do so clearly so that all investors understand that is the deal. To protect investors, the parties, however, may not eliminate the implied contractual covenant of good faith and fair dealing.

Delaware also offers statutory trusts, which are often used in structured finance transactions or for asset management. Statutory trusts are created by a governing instrument under which property is managed or business is conducted by one or more trustees for the benefit of owners who have a beneficial interest in the trust property. Statutory trusts offer flexibility, as the governing instrument may establish whatever rights and obligations the trustees and beneficial owners wish. They also offer protection from creditors and limitation of liability.

Delaware’s law also provides for nonstock corporations, which differ from typical stock corporations in that they do not have stockholders, but only members. These membership corporations offer the same stable corporate structure as do traditional corporations, but they also provide managers and investors with added flexibility (and less complexity) in arranging their business affairs. Delaware nonstock corporations are ideal for nonprofit entities, which do not make profit or pay dividends to their members. Many prominent charitable entities are formed as Delaware nonprofit nonstock corporations, which reap the benefits that Delaware offers to all corporations while enjoying a flexible statutory foundation that exempts them from many of the administrative burdens on for-profit stock corporations.

No matter what a business needs, Delaware offers an entity that can meet those needs. Delaware’s stable yet flexible statutes provide a number of different entity options, each of which is entitled to all of the advantages open to Delaware business entities.

For information on the law firms and corporate service providers that authored these articles, please visit our acknowledgements page. The State of Delaware is grateful for their assistance.

Legal Disclaimer: The materials contained herein are intended to provide information in regard to the subject matter covered. The Delaware Department of State is not engaged in rendering legal, accounting, or other professional services. If legal advice or other professional assistance is required, the services of a qualified professional should be sought.

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