Why Delaware LLCs?

Abstract

For years, scholars have debated why parties choose to incorporate under Delaware law companies that operate businesses in other states — since different answers to this question lead to different normative assessments of the practice. Traditionally, this debate focused on public corporations and ignored private firms and non-corporate forms of business. The exploding use of limited liability companies (LLCs) instead of corporations, and the formation of LLCs under Delaware law to operate businesses outside Delaware, call for expanding this discourse to ask “Why Delaware LLCs?”. This article adds to the recent literature seeking to answer this question empirically. It critiques recent studies that looked for statistically significant correlations between state of formation choices for LLCs and differences in state LLC statutes and legal infrastructure. Finding this methodology suffers from inherent limitations, this article presents results from a different approach. I interviewed business attorneys whose clients have formed LLCs and asked them a battery of questions designed to ascertain why their clients formed LLCs in Delaware. The results of this survey provide important insights into the aspects of Delaware’s substantive LLC law and its legal infrastructure that motivate formation of Delaware LLCs, and thereby serve as an important complement to the existing statistical studies.