Choosing the State of Organization of the Limited Liability Company

The Act provides that the laws of the state or foreign country under which a foreign LLC is organized govern its organization and internal affairs and the liability and authority of its members, and that a foreign LLC may not be denied registration by reason of any difference between those laws and the laws of California. Corp C §17450. Therefore, the Act permits members to “forum shop” for the LLC Act deemed most compatible with the members’ business purposes.

Additional Costs of Foreign LLCs
Organizing an LLC in another jurisdiction may be more costly than doing so in California. There may be additional filing fees and annual maintenance fees, and the expense of maintaining an agent for service of process in the state of organization. Further, the practitioner must learn and keep abreast of the law of the foreign jurisdiction, and the client may need to engage local counsel. The California Act is quite flexible, giving members great latitude in drafting the operating agreement and structuring and operating the LLC. Thus, for most businesses headquartered and doing business primarily in California, there appears to be little advantage in choosing a jurisdiction other than California in which to organize an LLC.

Advantages of a Delaware LLC
Although California provides an attractive forum for most businesses, many practitioners recommend forming a Delaware LLC in lieu of a California LLC for transactions in which the additional costs are not a controlling factor. In Delaware, the operating agreement may limit or eliminate the managers’ fiduciary duties to a greater degree than is permissible in California. See 6 Del Code §18-1101(b), (c). Further, Delaware permits the LLC to indemnify managers for breaches of fiduciary duty, something California may not permit. See 6 Del Code §18-108. For clients for whom the costs and inconvenience of litigating in a distant forum is not a dissuading factor, Delaware’s judiciary is considered to be among the most knowledgeable and experienced in matters of business litigation. This factor may lead to Delaware’s developing a comprehensive body of case law regarding LLCs more quickly than other jurisdictions. Finally, the Delaware Act makes explicit the principle of freedom of contract. 6 Del Code §18-1101(b). While this principle is undoubtedly implied in the California Act, it is not expressly stated. The express affirmation of freedom of contract in the Delaware Act may enhance practitioners’ confidence that the operating agreement provisions they draft will be respected by a reviewing court. Delaware also permits the formation of series LLCs.

Advantages of Other States’ LLCs
There may be unique circumstances that would cause counsel to recommend a jurisdiction other than California in which to form an LLC. For instance, California prohibits professional LLCs, while at least 45 other states authorize them. However, a foreign LLC may not render professional services in California.