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LLC vs Inc

Comparison ChartLLC vs. Corporation

What are the non-tax differences between the Delaware Corporation and LLC? Rest assured that both the Delaware Corporation and Delaware LLC offer owners limited liability. This shields the owners’ personal assets from business debts and is referred to as liability protection. You do not need to visit Delaware for this advantage. This comparison chart is designed to highlight the principal differences.

The Delaware LLC is the most popular choice because of its simplicity. Startups, small businesses, real estate investors, and many other businesses choose an LLC because it has few required dance-steps to follow to run it properly. An LLC is governed by a contract called an LLC Operating Agreement that is like a step-by-step instruction manual for the owners. The LLC Operating Agreement is a prenuptial agreement to help avoid ownership disputes later. Plus an LLC’s owners enjoy protection from the LLC being taken over by the creditors of their business partners. While most entrepreneurs worry about business creditors, the biggest risk is business partners. This is exactly the type of problem the LLC anticipates to help keep you out of court.

A corporation has rules upon rules. It has three levels of bureaucracy. It is owned by shareholders, managed by directors, and operated day-to-day by officers. The corporation is incorporated, meaning many rights are restricted and set forth in the statute, rather than a private flexible contract. Both can be used to run businesses.  Generally, if you are not familiar with the strict procedures of a corporation, form a Delaware LLC. The LLC is also recommended for real estate ownership.

Limited Liability Company (LLC)

Corporation

Getting Started

Starts with: Certificate of Formation

Names Agent Only
Starts with: Certificate of Incorporation

Agent
Stock – Total authorized shares + par value
Certain rights/restrictions

Ownership & Control
(People Involved)

Owners: Members
elect
Management: Managers
(Third Parties – Manager Managed)
or
Managing Member(s)
(Member Managed)
Owners: Stockholders
elect
Directors
(Regular Elections)
appoint
Officers
(Appointed by Directors NOT stockholders)
Members and Managers Can
be humans or other entities
Stockholders Can
be humans or other entities; Though Directors and Officers must be humans (S-Corporation stockholders must be US Citizens only)
Not Required
Formal annual meeting
Required
Formal annual meetings & elections

Can I have a Single-Person Entity?

Can have "single-member LLC" where human or entity is member and manager Can have one-person corporation in which the individual is the sole stockholder, sole Director, and sole Officer

Documents

Management named in Operating Agreement
(a.k.a. LLC Agreement)
Procedure to elect Directors in the Bylaws
Minutes show formal elections & resolutions to issue stock

Voting

Members vote
Can also have second class of non-voting members dependent upon the Operating Agreement;
Very flexible
Usually only one class of voting common stock
(can also have additional classes, but they must be in Certificate of Incorporation)

Changes

No need to amend the Certificate of Formation
Changes can be made directly to the Operating Agreement
Certain changes require amendments to Certificate of Incorporation

Transfer Restrictions

Rights to prevent unwanted members & transfers can be written into the Operating Agreement Restrictions on transfers NOT in Bylaws or Certificate of Incorporation
Only in separate Stockholder Agreement (with notice on each stock certificate)

Certificates

No ownership/member certificate required
Usually ownership is not certificated
Stock certificates required
Stock transfer ledger records certificate issuance and changes

Ownership

Ownership held by members usually called "Interests" or "Units" Ownership in stock/shares
(typically 1500 shares of common stock with zero par value)

Tax

Defaults to Partnership tax status, or for one-member LLC is disregarded for tax reasons
Can also elect S-Corp or C-Corp status
Defaults to C-Corp tax status but may elect S-Corp status
Cannot elect partnership tax status

Duties

Majority Members + Managers owe duties
All fiduciary duties CAN be modified or waived
Directors, Officers, and Controlling Shareholders always owe duties
Most fiduciary duties CANNOT be waived

Delaware Filing Fee

$90 $89
(minimum; depends on number of pages, amount of stock, and par value)

Delaware Annual Fee

$300 (fixed) $225-400 (minimum)
Based on authorized shares

Limited Liability Company

Getting Started

Starts with: Certificate of Formation

Names Agent Only

Ownership & Control (People Involved)

Owners: Members
elect
Management: Managers
(Third Parties – Manager Managed)
or
Managing Member(s)
(Member Managed)
Members and Managers Can
be humans or other entities
Not Required
Formal annual meeting

Can I have a Single-Person Entity?

Can have "single-member LLC" where human or entity is member and manager

Documents

Management named in Operating Agreement
(a.k.a. LLC Agreement)

Voting

Members vote
Can also have second class of non-voting members dependent upon the Operating Agreement;
Very flexible

Changes

No need to amend the Certificate of Formation
Changes can be made directly to the Operating Agreement

Transfer Restrictions

Rights to prevent unwanted members & transfers can be written into the Operating Agreement

Certificates

No ownership/member certificate required
Usually ownership is not certificated

Ownership

Ownership held by members usually called "Interests" or "Units"

Tax

Defaults to Partnership tax status, or for one-member LLC is disregarded for tax reasons
Can also elect S-Corp or C-Corp status

Duties

Majority Members + Managers owe duties
All fiduciary duties CAN be modified or waived

Delaware Filing Fee

$90

Delaware Annual Fee

$300 (fixed)

VS.

Corporation

Getting Started

Starts with: Certificate of Incorporation

Agent
Stock – Total authorized shares + par value
Certain rights/restrictions

Ownership & Control (People Involved)

Owners: Stockholders
elect
Directors
(Regular Elections)
appoint
Officers
(Appointed by Directors NOT stockholders)
Stockholders Can
be humans or other entities; Though Directors and Officers must be humans (S-Corporation stockholders must be US Citizens only)
Required
Formal annual meetings & elections

Can I have a Single-Person Entity?

Can have one-person corporation in which the individual is the sole stockholder, sole Director, and sole Officer

Documents

Procedure to elect Directors in the Bylaws
Minutes show formal elections & resolutions to issue stock

Voting

Usually only one class of voting common stock
(can also have additional classes, but they must be in Certificate of Incorporation)

Changes

Certain changes require amendments to Certificate of Incorporation

Transfer Restrictions

Restrictions on transfers NOT in Bylaws or Certificate of Incorporation
Only in separate Stockholder Agreement (with notice on each stock certificate)

Certificates

Stock certificates required
Stock transfer ledger records certificate issuance and changes

Ownership

Ownership in stock/shares
(typically 1500 shares of common stock with zero par value)

Tax

Defaults to C-Corp tax status but may elect S-Corp status
Cannot elect partnership tax status

Duties

Directors, Officers, and Controlling Shareholders always owe duties
Most fiduciary duties CANNOT be waived

Delaware Filing Fee

$89
(minimum; depends on number of pages, amount of stock, and par value)

Delaware Annual Fee

$225-400 (minimum)
Based on authorized shares

LLC vs. Corporation Entity Comparison

How to Start a Delaware LLC or Corporation?

Starting a LLC

A Certificate of Formation is the document filed with the Secretary of State to create a Limited Liability Company (LLC). The Certificate of Formation is returned to the Incorporator with the state’s digital stamp listing the date of formation. This document is the “birth certificate” of the LLC. Only the name and address of the Agent are listed on the C.O.F.

Starting a Corporation

The Certificate of Incorporation is the document filed with the Secretary of State that sets for the Corporation’s name, Registered Agent, authorized stock and certain other information required or permissible to be included according to Delaware Law. This is the “Corporate Charter”. The corporation is incorporated as of the time the state date-stamps the document.

Who Owns and Controls a LLC or Corporation?

LLC Ownership

The owners of an LLC are referred to as “Members”. LLC Members can either manage the LLC themselves (Member-Managed LLC) or the Operating Agreement can have provisions that allow for the LLC to be Managed by non-owner executives (Manager-Managed LLC). The LLC Agreement would also set forth the powers granted to these non-owner Managers. The Members of the LLC can be natural persons or other entities and, unlike a corporation, no formal meetings are required by statute.

Corporation Ownership

The Initial Minutes of the Incorporator which we prepare elect one or more Directors. We also prepare the Unanimous Action of Directors to elect officers and direct stock to be issued to one or more stockholders. Stock certificates for one or more stockholders are also typically prepared. Stockholders meet at an annual meeting to elect Directors of the corporation.

Can a LLC or Corporation have 1 Person?

Single Member LLC

LLCs can have a sole Managing-Member. An LLC is a disregarded entity for tax purposes if it is a single-member LLC. It is advisable to obtain a Tax ID number for the LLC even if it has only one member.

1 Person Corporation

Similar to an LLC, you can have a 1-person corporation. One person can be the sole stockholder, Director, President, Secretary and Treasurer. If a corporation has more than one stockholder, a Stockholder Agreement is advisable.

What Documents do you Need to Get Started?

LLC Documents

Our professionally-prepared Operating Agreement sets forth the ownership, management structure and procedures of the LLC. This LLC Agreement is required by law and, even though it can be oral, a written Operating Agreement is the best way to make it enforceable.

Corporation Documents

Directors are elected at an annual meeting of a board of stockholders or by written consent in lieu of an annual meeting. These elections are documented in minutes. Resolutions to issue stock are authorized by initial Directors.

How do you Vote in a LLC or Corporation?

LLC Voting

The Operating Agreement can define whether all members, a specific member or class of members have voting rights. These voting rights may be based on a financial interest, class, group, or any other basis. The Operating Agreement may also set forth quorum requirements, voting by proxy or any other matter with respect to voting rights.

Corporation Voting

A corporation usually only has one class of ownership/stockholders, but there can be additional classes that are permitted by the Certificate of Incorporation or Amendments thereto. Amendments to the number of authorized shares of stock of a corporation must be done through an Amendment to the Certificate of Incorporation.

How to Change a LLC or Corporation?

LLC Changes

Should you change the agreement or ownership structure of an LLC, an amended and restated LLC Operating Agreement should be signed each time the agreement changes. The Certificate of Formation does not need to be changed.

Corporation Changes

Changing the corporate name, increasing or decreasing the amount of authorized stock and reclassifying stock are examples of actions that require amendments to the certificate of incorporation or a restated certificate of incorporation.

Does an LLC or Corporation Protect Against Unwanted Partners?

LLC Protection

Right of First Offer (ROFO), Right of First Refusal (ROFR) are examples of provisions that can be added to an LLC Agreement that limit what is permissible when a member retires, dies or for any reason decides to sell his or her LLC interest. It is also possible to prohibit the sale of a member’s LLC interest.

Corporation Restrictions

The only way to keep out unwanted stockholders is with a Stockholder Agreement that sets out the powers and rights of stockholders, as well as their relationship with the corporation and must be executed by all stockholders. It can place restrictions on transferring stock. In closely held corporations with very few stockholders, these agreements are especially important because they will govern the relationship between the stockholders.

What Certificates are Required for a LLC or Corporation?

LLC Certificates

LLC ownership can be certificated, but usually it is not. LLC ownership is set forth in the Operating Agreement.

Corporation Certificates

Shares of a corporation are represented by certificates. The shares of stock in a corporation are considered personal property and transferable, provided the transfer does not violate the corporation’s Stockholder Agreement.

How is Ownership Established in a LLC and Corporation?

LLC Ownership

LLC ownership is usually referred to as LLC “interests” or “units”. This is what people often refer to as “shares” or “stock” in an LLC, although such is ownership terminology of a corporation only.

Corporation Ownership

To reduce state filing and maintenance fees, it is advisable for most corporations to incorporate as a “minimum stock” corporation, meaning 1,500 total shares are authorized at zero par value. Ownership and control of the corporation is based on the number of shares owned, because each voting share entitles the owner to a certain number of votes in corporate actions.

How are LLCs and Corporations Taxed?

LLC Taxes

By default, an LLC with at least two members is classified as a partnership for federal tax purposes unless it files Form 8832 and selects to be treated as an S-Corporation or C-Corporation. A single-member LLC is a disregarded entity for federal tax purposes.

Corporation Taxes

S corporations are corporations that elect to pass corporate profits or losses through to its shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of profits and losses on their personal tax returns and are assessed tax at their individual income tax rates.

What Duties do the Different Roles Have in a LLC or Corporation?

LLC Duties

An LLC has the greatest amount of flexibility when it comes to waiving or assigning fiduciary duties owed by members and managers. In contrast, directors and officers of a corporation have certain fiduciary duties required by law that cannot be waived or reduced.

Corporation Duties

Certain duties (care and loyalty, for example) are required of Directors and extend to officers in decisions in which they are involved. These are known as fiduciary duties and cannot be waived.

What are the Delaware Filing Fees?

Delaware LLC Filing Fees

The filing fee to form an LLC in Delaware is $90 and relatively cheap compared to other states. Some states like Illinois and Massachusetts have a $500+ filing fee.

Delaware Corporation Filing Fees

$50 (Div. of Corporations Fee) + $15 (Filing Fee Tax) + $24 (County Fees) = $89 (minimum total filing fee). $9 per additional page.

What are the Delaware Annual Fees for a LLC or Corporation?

Delaware LLC Annual Fee

The Delaware Annual LLC fee (Franchise Tax) is a flat $300 and not adjusted based on capitalization. Paying this fee and maintaining a registered agent are the two requirements to keep an LLC in good standing in Delaware.

Delaware Corporation Annual Fee

$225 is the minimum using authorized shares method ($175 tax + $50 filing fee). $400 is the minimum for corporations with more than 1,500 shares authorized ($400 tax + $50 filing fee).