LLC vs. Corporation
Once you have decided you want to incorporate, you may be unsure whether to choose a corporation or an LLC. Corporations and LLCs differ in significant ways, such as the management structures, the statutory filing requirements, whether you must hold annual meetings, and even the annual fee you must pay, known as franchise tax.
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.
LLC vs. Corporation
LLCs and corporations differ especially when it comes to things like ownership and structure. A corporation a statutory entity that has different layers of ownership and management. An LLC is also authorized by statute, but it is a contract-centric entity. LLC ownership and management can be as simple or complex as the owners want. You can have a single managing member or an LLC, or you can contract to manage the LLC with a Board of Managers, similar to a corporation.
For more details on LLC vs. corporation, see the information below.
LLC Fast Facts
The Delaware LLC is the most popular choice because of its simplicity. An LLC is not a corporation, but it shares certain characteristics, including limited liability for its owners. 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.
Corporation Fast Facts
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.
Below is a basic breakdown that can help answer your LLC vs corporation questions.
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 | 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 Canbe humans or other entities | Stockholders Canbe humans or other entities; Though Directors and Officers must be humans (S-Corporation stockholders must be US Citizens only) | |
Not RequiredFormal annual meeting | RequiredFormal 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 | $110 | $109 (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 Canbe humans or other entities |
Not RequiredFormal 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 Canbe humans or other entities; Though Directors and Officers must be humans (S-Corporation stockholders must be US Citizens only) |
RequiredFormal 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 Registered 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 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 $110 and relatively cheap compared to other states. Some states like Illinois and Massachusetts have a $500+ filing fee.
Delaware Corporation Filing Fees
$70 (Div. of Corporations Fee) + $15 (Filing Fee Tax) + $24 (County Fees) = $109 (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).