Delaware has a reputation for being a kind of semi-onshore jurisdiction whose corporate governance laws served as a reference for the majority of today’s offshore world.
The state originally adopted a pro-business approach to its rulemaking in the late 19th century, pulling in a good amount of investments from all over the U.S and eventually became a renowned jurisdiction for doing business.
There’s a good selection of entity types for you to choose from when incorporating but people often start with either a Corporation or an LLC given their highly optimized legal features.
Financial firms take up an especially large number of incorporated entities within the area because of the favorable usury laws which enable banks and credit card companies to increase their interest rates on loans.
Delaware Corp vs LLC: Which is The Best For Your Business?
1. Comparing Delaware Corporation and LLC
On a surface level, the two seem to not be far off from each other in terms of legal features. They both provide business owners with liability protection, insulating them from litigations and asset seizures. In short, the owners are only liable for the amount of contribution they pledged within the by-laws to the company.
Another converging point between the two is that by default, they’re considered perpetual entities unless stated otherwise at the start of formation. With these similarities established let’s get into where they differ to help you get a clearer image on which one to choose.
i. Governing Infrastructure
Choosing to form a Delaware corporation has certain perks that you should put into perspective in regards to your own business model. A Delaware corporation has a typical corporate echelon.
Shareholder being the highest tiered title, then to the Directors and finally officers (optional). Note that the mentioned structure is indelibly prescribed within the Corporation Law and can not be subject to change.
In detail, shareholders are the ones that own the corporation through stock ownership. Stocks can be divided into multiple classes that have different voting rights and yield returns.
For an LLC, the entire governing structure is discussed and prescribed in a bylaw, aka Operating Agreement separate to the Corporation Law. Within it shall contain information such as member interests, LLC interests, capital accounts, management rights, and responsibilities, etc.
Overall, this provides a more flexible ground on which members can negotiate power dynamics and dispute resolutions. Unlike the three-tiered structure of a corporation where the role of every title is set in stone, an LLC provides leeway for the members themselves to either take on managerial responsibilities or enlist an external manager to do it for them.
When it comes to, you are given more flexibility on how your corporation will be taxed. Currently, there are three tax options that the IRS offers, namely C-corporation, S-Corporation, and Non-profit.
Out of the three, an S-corporation seems to be the most desirable for its advantage of having the “pass-through” feature as a double taxation avoidance. In this respect, the profits and losses are directly passed through to the shareholders.
S-corporations don’t pay corporate taxes. Instead, the shareholders file and pay personal income taxes on their distributed earnings.
Taxation for an LLC is at first acquired by recording an application for an Employer Identification Number or EIN (additionally called a Federal Tax ID Number). Normally, for charge purposes, the IRS considers a solitary part LLC an ignored substance and a multi-part LLC an association.
Corporations in Delaware are generally made to disclose information regarding the name and physical address of the Directors, Officers, and the business itself upon incorporation.
In this matter, the LLC seems to be the better of the two, as it requires little information during registration. The only party with retainment responsibility is the registered agent who has to collect the name and address of a Communications Contact. This designation can be allotted to a member/manager of the LLC or its attorney.
The degree of protection, however, does not exclude the entity from lawful disclosure duty. If any relevant body of law were to demand cooperation via the form of disclosure, all LLCs must provide information on their founders, members, and representatives.
2. Which one is right for you?
As with many other things, there’s no definitive answer to this question and the decision must be made with the consideration of your business’s nature and scale.
An S-corp solves the foremost problem of double taxation by allowing profits and losses to pass through directly to the shareholders. For this, it’s generally a popular choice for small local businesses looking to optimize their spendings while still having liability protection.
However, in terms of accessibility, only shareholders who are permanent residents of the U.S can apply for this entity type. On top of this, an S-corporation can only have 100 shareholders and issue one class of stock.
An LLC typically suits businesses that operate in holding real estate, owning intellectual property, attaining government contracts or licenses, etc. Costs and compliance are relatively easy to maintain. A US$300 annual Franchise Tax Fee must be paid to the Secretary of State, and along with that, a registered agent fee.
In general, Delaware LLCs and partnerships are comparable in that both require state documenting upon arrangement; both exist unendingly except if in any case indicated, and the two substances safeguard their individuals/investors from individual risk.
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Author: Nghĩa Nguyễn Phạm Ngọc