There are several distinct differences between a Delaware corporation and a Delaware LLC. We have been forming both types of business entities for over 30 years, and can explain the differences between these two popular types of companies.
The principle difference between a corporation and an LLC is the governance structure.
A corporation is structured with three tiers of power: shareholders, Directors and officers. This structure is prescribed by Delaware Corporation Law and cannot be changed.
The duties of each tier, and the relationship between them, are also designed by Delaware law. The shareholders are the owners of the company; they invest money by purchasing stock, thus becoming owners.
Once shareholders buy stock, they become entitled to two specific rights: 1) one vote per share in stockholder votes and 2) their pro rata share of the dividends when the Board of Directors declares a distribution of profits in the form of shareholder dividends.
An LLC is governed by a contract between all the members, called an Operating Agreement. The Operating Agreement is binding on all signatories, and all members of the LLC must sign it. Some of the specific issues an LLC's Operating Agreement may determine are:
The default structure is that the LLC is comprised of members and one manager. The members may manage the company themselves or they may hire an external manager.
The second substantial difference between a corporation and an LLC is federal taxation.
A corporation has three choices as to how the IRS will tax it. The default classification is called a C corporation. This type of company pays taxes on its profits each year and may choose to distribute dividends to its shareholders.
When shareholders receive a dividend, they pay individual tax on the money. If the shareholders are a small, tight-knit group, this is often referred to as double taxation.
In order to avoid double taxation, a corporation with fewer than 100 shareholders can elect Subchapter S tax status by filing IRS Form 2253 within 75 days of its formation date, or in subsequent tax years.
(A subchapter S company is often referred to as an "S corporation." Under this form of taxation the entity does not pay taxes to the federal government. Instead, the tax liability on the profits and losses of the company are "passed through" to the shareholders of the company in their pro-rata share of the company. Then, the shareholders must pay the taxes.)
Please note non-U.S. citizens cannot apply for S corporation status.
The third taxation option for a corporation is tax exempt status, which turns the corporation into a non-profit company. To gain tax exempt status, the company must file IRS Form 1023 and qualify for tax exempt status by engaging in a qualifying charitable, religious or public service purpose.
Tax classification for an LLC is initially gained by filing an application for an Employer Identification Number or EIN (also called a Federal Tax ID Number). Typically, for tax purposes, the IRS considers a single-member LLC a disregarded entity and a multi-member LLC a partnership.
(To change the Entity Classification Election to a C-Corp for federal tax purposes, the company needs to file IRS Form 8832. To change the classification to an S-Corp, the company needs to file IRS Form 8832 and, simultaneously, IRS Form 2553.
The third significant difference between a Delaware corporation and an LLC is privacy.
A Delaware corporation's annual report must state the name and physical address of all the Directors; the name and physical address of one officer; and the physical address of the corporation's principal place of business.
In contrast, the state of Delaware requires very little information in order to file an LLC; in fact, it does not require the personal names and addresses of the members/managers.
All the state requires is that the LLC's Registered Agent possesses the name and address of a Communications Contact, who can be a member/manager of the LLC or merely a representative, such as the company's attorney.
Under normal circumstances, it is difficult to obtain the LLC's members' names, as they are not required to be disclosed, but if required by law, Registered Agents are obligated to disclose any and all information on record as well as all transactions with the LLC and its founders, members and representatives.
The organizational formalities of an LLC are much more casual than in a corporation; there is no Board of Directors in an LLC, thus no Board of Directors meetings. Subsequent meeting minutes and state annual reports are not required.
Delaware LLCs and corporations are similar in that both require state filing upon formation; both exist perpetually unless otherwise specified; and both entities shield their members/shareholders from personal liability.
If you would like more information on either a Delaware corporation or LLC, please feel free to contact the experienced business formation specialists here at Harvard Business Services, Inc. You can call us at 800-345-CORP (2677) or email us.
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