As discussed in the last few weeks and will continue in the next several weeks, This Week in Real Estate examines Limited Liability Partnerships (LLP) and Limited Liability Companies (LLC), their history, and their similarities and differences.  This week continues with discussing LLC’s freedom of contract.

One of the most important characteristics of LLCs under most or all jurisdiction’s LLC acts is the freedom of contract.  As discussed in a previous edition of This Week in Real Estate, Where to Form Your Business Entity, Delaware’s LLC Act is extremely flexible.  “If a structure can be imagined, chances are it can be accomplished with a Delaware LLC.”

The most famous expression of LLC freedom of contract is § 18-1101(b) of the Delaware LLC Act. Section 18-1101(b) provides that “it is the policy of this [Act] to give the maximum effect to the principle of freedom of contract and the enforceability of LLC agreements.”  The Delaware LLC Act has deeply influenced the drafting of many other LLC acts across the country, and at least 17 other acts contain a provision identical to Delaware’s § 18-1101(b). But even LLC acts that don’t contain such a provision are characterized, like the Delaware LLC Act, by the fact that virtually all of their provisions relevant to LLC formations are default provisions.  In other words, provisions whose very terms expressly permit LLC members to contractually alter them as they wish in their operating agreements to meet their specific and unique needs and interests.

The leading Delaware case interpreting LLC freedom of contract is Elf Atochem North America v. Jaffari, 727 A.2d 286 (Del. 1999), which was decided by the Delaware Supreme Court on April 6, 1999. In Elf Atochem, the Delaware Supreme Court stated that the intent of the DLLC Act is to give LLC members the “broadest possible discretion in drafting their [LLC] agreements” and “a great deal of certainty that their…agreement will be enforced in accordance with its terms”. Further in Elf Atochem, the Delaware Supreme Court stated that even LLC statutory provisions that appear by their terms to be mandatory should normally be construed as merely default unless they are intended to protect the rights of non-parties to LLC deals.

Next week, This Week in Real Estate continues the discussion of LLCs and LLPs, discussing the most important non-tax issues in drafting partnership agreements or operating agreements for multi-member LLCs.