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"After serving on the bench for the last 16 years I sincerely believe that Harvard Business Services, Inc.
is the most professional, knowledgeable, and customer focused formations company in the State of Delaware.The proven reliability,
accuracy and Harvard's 25 years of experience are invaluable when starting and maintaining a company."
Hon. Joseph B. Melson
Delaware State Court
Retired
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Your data is kept confidential and is not released to third parties.
Your personal information is encrypted by Secure Sockets Layer (SSL) software so that it cannot be read as the information travels over the Internet.
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Incorporating 101:
Comprehensive Online Guide.
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The Different Types of Delaware Entities
Find all the information that you need to know about the different types of entities that you can create in the state of Delaware.
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What are the different types of entities? |
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There are limited liability companies, general corporations, close corporations, S-corporations, non-stock corporations, statutory trusts, and limited partnerships.
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How do I decide what type of entity is best for me? |
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Short of consulting an attorney or accountant, the following chart details the advantages and disadvantages to utilizing each type of entity.
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Expand Table |  |
Sole Proprietorship | |
Limited Liability Company | |
General Corporation | |
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| Formation | |
No State filing required | |
State filing required | |
State filing required | |
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| Liability | |
Unlimited Personal Liability. Typically liable for the debts of the Sole Proprietorship | |
Typically, Members are not personally liable for the debts of the LLC | |
Typically, Shareholders are not personally liable for debts of the Corporation | |
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| Raising Capital | |
Contributions often limited to individual´s funds | |
Potential to sell interests, contingent upon operating agreement restrictions | |
Shares of stock are usually sold to raise capital | |
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| Taxation | |
Not a separate taxable entity. Owners pay all of the taxes | |
Not taxed at entity level if properly structured. Profit/loss is passed through directly to the members | |
Taxed at the entity level and shareholders receiving dividends are taxed at the individual level | |
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| Formalities | |
Minimal legal requirements | |
Less formal meetings and minutes are required than for corporations. State reporting required | |
Board of directors, formal meetings, minutes and annual State reports are required | |
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| Management | |
Sole proprietor has full control and responsibility of management, operations, and day-to-day activities | |
Members have an operating agreement that outlines management responsibilities | |
Shareholders elect board of directors to appoint officers for day-to-day management | |
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| Existence | |
Typically ceases doing business upon the death of the sole proprietor | |
Perpetual unless otherwise specified | |
Perpetual unless otherwise specified | |
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| Transferability | |
Ownership non-transferable | |
Contingent upon operating agreement restrictions | |
Shares of stock are transferred with ease | |
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What is a Limited Liability Company (LLC)? |
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An LLC is a relatively new type of entity in the U.S. It combines the limited liability of a corporation with the pass-through taxation of a partnership. Owners (or members, as they are called) of an LLC can be individuals or any type of entity, from anywhere in the world, and unlimited in number.
Using a Delaware LLC, non-resident aliens of the U.S. can legally avoid all U.S. federal taxes for their non U.S. business activities.
American clients use LLC's for the tax benefits also, but the primary reason for using the LLC in the USA is its heightened protection against judgment creditors. In a General Corporation, formalities must be followed or creditors can destroy the protection from personal liability by "piercing the corporate veil". These formalities, such as stockholders and directors meetings, minutes, officers and director elections can be eliminated in the LLC, thus making it much more difficult to pierce.
Also, a judgment creditor of a member of an LLC cannot seize control of the assets of the LLC, or the member's voting rights, as they may be able to with a corporation.
The LLC is a hybrid business vehicle that combines some of the best features of corporations and partnerships. Like a corporation, an LLC has a legal existence separate and distinct from its owners; and its owners and managers are not personally liable for the company's debts and obligations. Like a partnership, an LLC can be treated as a pass-through entity for tax purposes. This feature, when combined with non-U.S. source income, means non resident aliens of the U.S.A. will avoid all U.S. taxation when using an LLC.
The operations and management of the LLC are governed by a written agreement among its owners that is not required to be publicly filed or disclosed to the Delaware Division of Corporations. As a result, an LLC allows secure anonymity and the ability to create a customized management structure, which prescribes the economic relationship among owners. The agreement can be written in any language and it is not required to be translated into English.
The Delaware LLC statute allows parties to define their business relationship in the written agreement as they so desire. This is called "freedom of contract". Delaware Law provides rules only for those matters on which the parties have failed to agree. The stated policy of the Delaware LLC law is to give maximum effect to the principle of "freedom of contract" and to the enforceability of LLC agreements. The contractual flexibility offered by the Delaware Act is unmatched by any other LLC statute.
If you properly "check the box" when applying for an EIN, a Delaware LLC will be treated as a partnership for Federal income tax purposes; therefore, it will not be subject to U.S. Federal income tax. For non-resident aliens of the USA, this means Delaware is an attractive jurisdiction for benefits typical of many "offshore Jurisdictions". Combine that with the added strength of the USA's fiscal infrastructure, and you have an attractive comparative advantage.
While the Delaware Act permits a Delaware LLC to be managed by its members, it does not require members to be managers. More importantly, it also provides that no member or manager is obligated personally for any debt, obligation or liability of the Delaware LLC solely by reason of such person's being a member or acting as a manager. This limitation on personal liability compares favorably with the limitation on personal liability enjoyed by stockholders of a Delaware corporation.
If properly selected on the SS-4 form, a Delaware LLC will be treated as a partnership for Federal income tax purposes; therefore, it will not be subject to U.S. Federal Income Tax. This means that a Delaware LLC can offer the same tax advantages as a Chapter S corporation or a limited partnership, including the ability to provide through a written agreement for allocations of income and/or distributions to members in amounts which differ from the members economic interest in the LLC, as well as the ability to provide basis to members for non-recourse debt. A Delaware LLC will also provide greater tax flexibility in areas of distributions and can be used as a valuable tool for estate planning and wealth transfers.
Key Elements of the LLC:
- Not taxed by the IRS at the entity level, if partnership tax treatment is selected on the SS-4 form
- A creditor of a member of an LLC cannot seize control of the assets of the LLC, or a member's voting rights
- There is unmatched contractual flexibility with a Delaware LLC
- Corporate formalities like minutes, bylaws, meetings, officers and directors can be eliminated in the LLC agreement
- Personal liability is limited for owners and managers to the amount of their investment in the company, just like a corporation
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What is a General Corporation? |
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In many situations, a general corporation, often referred to as the "stock corporation," "open corporation," or "C Corporation," is recommended, especially when there will be more than 30 stockholders in a company, such as a company planning to "go public" or planning a private offering of stock.
A general corporation is allowed a broad spectrum of flexibility. This is thanks to the general corporation laws of Delaware and the legal cases that have set a 200 year consistent pattern of respecting good-faith management decisions.
A general corporation typically has three tiers of power, the Stockholders, the Directors, and the Officers. Each of these groups has different rights and responsibilities within the corporation.
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The Stockholders are the owners of the company, but they do not manage the company. Typically, holders of common stock have the right to one vote for each share they own to elect the members of the Board of Directors and to vote on certain other matters of major significance to the company.
Any stockholder who holds a majority of the shares of issued stock can control the company. This is sometimes referred to as a "majority shareholder". Majority shareholders take on a heightened responsibility to minority shareholders.
Minority stockholders (any stockholder without a controlling role in the company) generally have no responsibility to the company. They can usually sell their stock whenever they want and they can assign or give their votes to anyone else they choose.
Stockholders are rewarded in two ways; (1)the dividends paid on their stock when and if the Board of Directors declares a dividend, and (2)the increase in the value of their stock when the company grows.
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The Directors run the company and are responsible for the overall management of the company. They take responsibility for all the major business actions such as the issuance of stock, the election of officers and hiring key management, the establishment of corporate policies, and the setting of their own and key officers' salaries and compensation packages.
Directors decide IF a dividend will be given to the stockholders, and if so, how much. Directors issue stock in the company, and they may own stock in the company, themselves.
Directors have certain fiduciary responsibilities to their company. They must be loyal to the company: they must make informed, independent decisions as board members; they must not act in bad-faith, such as self-dealing or fraudulent dealings; and they must act in the best interests of the company and its stockholders.
Directors may make decisions and take action in either of two ways: in pre-announced meetings with a quorum present, or without a meeting by unanimous written consent of all directors. Directors cannot give or sell their votes to another Director or vote by proxy.
Ordinarily, directors may be removed and replaced -with or without cause- by the majority vote of the stockholders. This is why a majority stockholder can control the company.
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The Officers of the company work for the Board of Directors and handle the day-to-day business of the company. Officers carry out the Board's decisions and implement the Board's policy. Officers are usually the President, Vice President, Secretary, and Treasurer. However, the Board may appoint other officers as they see fit, such as a C.E.O., a C.F.O., a Sales Manager, Operations Manager, or any other title they wish to create.
Officers may be compensated with stock, or may purchase stock in the company at the direction of the Board of Directors.
Key Elements of General Corporation:
- Three tiers of power: Stockholders, Directors, Officers
- Clear separation of rights and responsibilities
- No limit to size
- Directors run the company
- Directors elected by the stockholders
- Stockholders own the company
- Minority stockholders are not responsible for the company
- Can be Subchapter S if all qualifications met
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What is a Close Corporation? |
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A "Close" corporation is a variation on the General Corporation, where the stockholders, directors and officers are typically the same people, and where they desire to remain a small tight-knit group, without a formal board of directors involved in the decision making process.
The Close Corporation from Harvard Business Services, Inc. is structured to eliminate the board of directors. This gives the stockholders the right to run the company directly and all responsibilities that the board has in a General Corporation. This eliminates one tier of "red tape".
Stockholders in a Close Corporation are restricted in the sale of their stock. The company and other stockholders have a right of first refusal to buy shares if any stockholder decides to sell. They may also impose other restrictions in their bylaws on the sale, transfer or disposition of the stock.
A Close Corporation may be structured and run like a partnership, in regard to management, division of profits, elections of officers, employment of stockholders and other aspects - all with the legal protection of a corporation.
In extreme cases, where the stockholders of a Close Corporation are deadlocked and unable to effectively manage the company, the Delaware Chancery Court may be petitioned by the directors or stockholders to appoint an impartial provisional director.
Key Elements of Close Corporations:
- Meant for the small, tight-knit group
- Restricted to no more than 30 stockholders - Cannot "Go public"
- Eliminates a Board of Directors
- Stockholders take on the directors' responsibilities
- Stockholders manage the company directly
- Restrictions on the sale or transfer of stock
- Corporation may be run like a partnership with all corporate benefits
- Provisional director may be appointed to settle disputes
- Can be Subchapter S if all qualifications met
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What is an S-Corporation? |
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One of the disadvantages of a corporation is that the profits are taxed twice - once at the corporate level by way of a corporate income tax, and again at the individual shareholder level if a dividend is declared. An S-Corporation, also referred to as S Corp. or Subchapter S Corp., is either a general corporation or close corporation that has elected with the IRS to be taxed pursuant to Subchapter S of the IRS Code. This election allows the profits of the corporation to pass-through the entity to the individual shareholders. Accordingly, these profits are only taxed once. Keep in mind that this election must be made shortly after formation, otherwise the corporation loses its ability to make that election until the following fiscal year.
Key Elements of S Corporations:
- Avoids double taxation
- Maintains limited liability protection despite pass through taxation
- Restricted to no more than 100 stockholders
- Stockholders must be US residents (includes resident aliens)
- Stockholders and directors must be individuals, not business entities.
- Restrictions on the sale or transfer of stock
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What is a Non-Stock Corporation? |
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Typically referred to as Non-Profit Corporations, the Non-Stock Corporation is owned by its members, because it has no stockholders. The members are defined in the by-laws, as well as the qualifications for membership. There can be different classes of members, including voting and non-voting members.
Some organizations offer memberships to anyone who joins and pays annual dues, others define the members as a specific group of people, such as a homeowners association where the members may be all the owners of property in a specific geographic area. You define the qualifications of membership.
If you are forming a not for profit company dedicated to religious, charitable, scientific, testing or public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the providing of facilities or equipment) or for the prevention of cruelty to children or animals, then you want to start with a non stock corporation and apply to the IRS for your 501(c) (3) approval. Personal gain is prohibited in a non stock non profit corporation, except as the benefits of membership apply.
Non-stock form of company can also be used for political associations, homeowners associations, political candidates campaign committees, fraternal organizations, trade associations and community activities, with the proper language in the Certificate of Incorporation.
Key Elements of Non-Stock Corporations:
- Board of Directors runs the corporation
- Voting members elect the Board of Directors
- May be structured to have a self-perpetuating board
- Membership qualifications defined in the bylaws
- No Stockholders, thus no "Owners"
Frequently used for:
- Charitable or Religious Organizations
- Homeowners Associations
- Political Organizations
- Trade Associations
- Community Organizations
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When is an LLC better than an S-Corporation? |
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There are two (2) main advantages that an LLC has that an S-Corporation does not. One advantage is that an LLC is governed by a private operating agreement that affords the company a tremendous amount of flexibility. An S Corp is governed by statutes and bylaws that limit the flexibility the company has with respect to management, profit distributions, meetings, etc. The other main advantage is that an LLC is allowed to have international and entity investors, whereas the shareholders of S Corporations must be US individuals. This provides LLCs with greater conduits for investment, as well as greater flexibility for multiple entity strategies. For more information, see the full comparison chart.
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Learn what you need to know Before and After you form your company. Find information regarding opening up your business bank account, local business license, first official meeting and other formalities.
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Find out which type of entity is best suited for your needs and when you should choose an LLC over a Corporation and vice versa. Understand the unique benefits of LLC, General Corporation, Close Corporation, S-Corporation and Non-Stock Corporation.
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Learn what a Registed Agent is, Why and When you need them, what it costs and how to go about appointing one.
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Find out why you need stock, how much and when to issue, the differences between Common and Preferred stock and from where you get stock certificates and other related supplies for your company.
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Important information on statutory requirements for annual maintenance, franchise taxes and registered agent fees and other corporate compliance issues.
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With more than 25 years of experience, over 20,000 clients worldwide, and offices in both the United States and Europe, HARVARD is the premier provider of registered agent and business formation solutions. Find out what sets us apart from other services.
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