Ownership, operations and management of the LLC are governed by a written agreement, called an LLC Operating Agreement, among its owners that is not required to be publicly filed or disclosed to the Delaware Division of Corporations, making the LLC very easy to operate and maintain.
By eliminating the formalities that go along with a corporation, the Delaware LLC has become so popular, it now accounts for 70 percent of all new business entities created with the state of Delaware Division of Corporations.
However, for many situations, a Delaware corporation has advantages as well. A Delaware corporation is the entity of choice when clients are looking to raise capital by selling shares of stock.
Typically, angel investors and Venture Capitalists prefer to invest in Delaware corporations above all other business entity types. Angel investors want to buy stock in a company that is already formed, filed and ready to sell stock.
Many investors prefer the rigid formalities the corporation offers, since there is a clear separation of rights and responsibilities between the shareholders, officers and the Board of Directors.
A C corporation is a tax status, not a business entity type. In fact, all corporations are, by default, C corporations, unless they file Form 2553 with the IRS for S corporation status or file a 501(c) application with the IRS in order to request non-taxable status.
A C corporation is a separate entity from its shareholders, and therefore C corporations offer limited liability protection to directors and shareholders.
A Delaware S corporation is a corporation that, in general, doesn't pay federal income taxes. One of the disadvantages of general and close corporations is that the profits on these types of corporations can be 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.
A Delaware S corporation is either a general corporation or a close corporation that has elected to be taxed pursuant to Subchapter S of the IRS code.
The election of Subchapter S tax status allows the profits of the corporation to pass through the entity to the individual shareholders and, accordingly, is only taxed once. Thus a Delaware S corporation has all of the benefits of a Delaware corporation but with a different tax status.
A Limited Partnership is a business entity that consists of one or more General Partners and one or more Limited Partners. The General Partner may be an individual or an entity, such as a corporation.
Typically, the General Partners are liable for any and all of the company's financial obligations, while the Limited Partners possess no liability for the company's debts, obligations or actions.
Business owners who want to earn profits but also help improve a faction of society, be it the environment, animal welfare, literacy, poverty or civil rights would want to form a benefit corporation so their company can sell stock and go public but also legally dedicate resources, money or both to the benefit corporation's ethical purpose.
In most ways, a benefit corporation is structured just as a general corporation is. However, every benefit company must declare, on its Certificate of Incorporation, what the company's benevolent purpose shall be.
A benefit corporation differs from a non-profit corporation in a variety of important ways.
In order to form an Exempt corporation, also known as a non-profit corporation, you will need to file an application for non-profit status with the IRS.
Part of the application should include a non-profit corporation's mission statement, which should include a declaration of what your organization hopes to accomplish.
A non-profit corporation's mission statement can be either simple or complex; however, since it is typically included in much of the non-profit corporation's marketing material as well as funding requests, it should be compelling and appealing.
Whether or not your corporation is considered a non-profit corporation depends on your surplus income; any income left after the payment of day-to-day operations cannot be transferred to shareholders, employees or directors of the corporation-it must be utilized to further the mission of the non-profit organization.
The most important aspect to filing a 501(c)(3) is the IRS application. IRS Form 1023 is the application for Recognition of Exemption under Section 501(c)(3). This 31-page application is very intricate. There is also a 1023EZ form that can be processed, which is the streamlined application for Recognition of Exemption under Section 501(c)(3).
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|Sole Proprietorship||Limited Liability Company (LLC)||General Corporation||Limited Partnership||S-Corporation||C-Corporation|
|Formation||No state filing required||State filing required||State filing required||State filing required||State filing required. Within 75 days of formation, IRS filing of Subchapter S election is required||State filing required. Within 75 days of formation, Form 2553 required to be filed with the IRS|
|Liability||Unlimited personal liability; typically liable for the debts of the sole proprietorship||Typically, members not personally liable for the debts of the LLC||Typically, shareholders not personally liable for the debts of the corporation||General partner carries full liability. Limited partners can lose only the amount of their investment||Typically, shareholders are not personally liable for debts of the corporation||Typically, shareholders are not personally liable for debts of the corporation|
|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||Limited partners provide capital in exchange for LP Units||Shares of stock are usually sold to raise capital||Shares of stock are usually sold to raise capital. Venture capitalists and angel investors are typically a good source of funding|
|Taxation||Not a separate taxable entity; owners pay all of the taxes||Not taxed at entity level if properly structured. Profit/loss passed through directly to the members||Taxed at the entity level and shareholders receiving dividends are taxed at the individual level||Partnership tax treatment on the federal level||Not taxed at the entity level. Shareholders are taxed at the individual level for profit/loss||Fringe benefits and owners' salaries can be deducted as business expenses. Shareholders may face double taxation|
|Formalities||Minimal legal requirements||Less formal meetings and minutes are required; state reporting required||Board of Directors, formal meetings, minutes and annual state reports required||Formal meetings, minutes and annual state reports required||Board of Directors, formal meetings, minutes and annual state reports required||Board of Directors, formal meetings, minutes and annual state reports required|
|Management||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||General partner fully responsible for management. Limited partners cannot participate in management||Shareholders elect Board of Directors to appoint officers for day-to-day management||Shareholders elect Board of Directors to appoint officers for day-to-day management|
|Existence||Typically ceases doing business upon the death of the sole proprietor||Perpetual unless otherwise specified||Perpetual unless otherwise specified||Perpetual unless otherwise specified in Partnership Agreement||Perpetual unless otherwise specified||Perpetual unless otherwise specified|
|Transferability||Ownership non-transferable||Contingent upon Operating Agreement restrictions||Shares of stock are easily transferred||Contingent upon Partnership Agreement||Shares of stock easily transferred after observing all IRS regulations and ownership requirements||Restrictions on transferring shares of stock.|
The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, startups and general business topics.