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What is the difference between a Corporation and a Limited Liability Company (LLC)?

Like a Corporation, an LLC offers limited liability to its owners. Unlike a corporation the Delaware LLC members have protection from creditors of the business, and also from future personal creditors of other members to keep those hostile creditors from taking over and liquidation the business. Unlike a corporation, Delaware LLCs are “creatures of contract”; they are constructed however you want, depending on how the LLC Agreement is written. This maximum contractual flexibility afforded by the Delaware LLC is not available to corporations. Corporations have strict rules and formalities that must be followed, like “dance steps”, that make them administratively burdensome to operate. The Delaware LLC is the preferred form of business for predictability and protection.

An LLC has an operating agreement that functions like a prenuptial agreement with other members to help resolve disputes before membership disagreements arise. In a corporation, there is no “built-in mechanism” or agreement between shareholders to resolve disputes.

As a practical matter, few corporations do this. IncNow offers this as an additional service. Few order this, and as a result, corporations cannot prevent other stockholders from selling stock to their worst enemies, and stockholders cannot force other stockholders to sell their stock when they stop working for the corporation. Therefore, the Delaware LLC is recommended and should be selected if you are in doubt of what type of entity to form. You can always convert to a corporation later, if needed. LLCs also have the tax flexibility of a corporation, if elected, as well as the preferred method of partnership/sole-proprietorship election not available to corporations. Therefore, unless investors are requiring the corporation and its strict formalities and strict fiduciary duties, the LLC should be selected. The LLC is also the most popular entity filed in the US and selected more than any other business entity.

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