It can be difficult to decide between an LLC vs. a corporation when you’re first incorporating. But what’s the difference between an LLC and corporation? There are actually a lot of nuances to consider. Which type of entity you choose will impact your yearly fees, whether you have to hold annual meetings, and how you go about limiting buying and selling of ownership interests. Here’s what you need to know.
Difference Between LLC and Corporation: Annual Fees
All Delaware LLCs formed or registered in Delaware are required to pay an annual franchise tax of $300. This is a flat fee that is not adjusted based on business revenue. There is no requirement to file an Annual Report.
The franchise tax for a minimum stock Delaware corporation is $175, using the Authorized Shares Method. Alternatively, a corporation with a high number of authorized shares can recalculate Delaware franchise tax using the Assumed Par Value Capital Method.
Both an LLC and corporate will also have to pay an annual fee to its Delaware registered agent if it does not have an office in Delaware. This varies depending on what the registered agent charges.
Difference Between LLC and Corporation: Formalities
LLCs have far fewer formalities compared to corporations. An LLC should follow established accounting practices and keep accurate books, but an LLC has the ability to structure its operating agreement to require as many, or as few, formalities as its members want. An LLC typically is not required to hold an annual meeting, elect a board of directors, etc.
A corporation, to maintain its corporate protections for owners and managers, must elect a board of directors and appoint officers. It must hold an annual meeting and must file a Delaware annual report. Failure to follow these corporate formalities can a result in the corporate charter being revoked and the directors being exposed to liabilities for mismanagement and breach of fiduciary duties.
Difference Between LLC and Corporation: Structure
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.
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.
Difference Between LLC and Corporation: Owners
An LLC is owned by Members. Members are identified in the company’s internal Operating Agreement. In addition to their ownership interest, Members can agree to also participate in managing the LLC’s day-to-day operations. Their only duties to the LLC are agreed upon and detailed in the Operating Agreement.
Corporations on the other hand are owned by shareholders. Shareholders are issued corporate stock in the company.
Difference Between LLC and Corporation: Flexibility
The 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 its flexibility, predictability and protection.
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.
Difference Between LLC and Corporation: Taxes
By default, an LLC has a federal tax status of a partnership for a multi-member LLC or the tax status of a sole proprietorship for a single member LLC. These are “pass-through” entities for tax purposes. All of the profits and losses pass-through the business to its members (owners) or sole member. These owners then pay taxes on the profits, or deduct the losses, on their individual 1040 personal income tax returns. Therefore, the business entity does not pay taxes directly. Instead a multi-member LLC only files an informational partnership tax return referred to as an IRS Form 1065. Then its members receive a K-1 for their share of the profits or loses. By agreement, this amount can be distributed disproportionate to ownership percentage.