Delaware LLC or Corporation

Delaware LLC or Corporation

While it’s not hard to set up a Delaware business entity, it’s crucial to understand your options before doing so. Learn more about forming an LLC, S-Corp or C-Corp in Delaware.

Defining LLCs, S-Corps and C-Corps

U.S. tax law defines an LLC as a “separate and distinct” legal entity whose owners aren’t held personally liable for corporate debts. This structure effectively shields LLC principals from financial ruin in the event of a corporate bankruptcy.

Also known as “pass-through entities,” S-Corps are small units that have no more than 100 shareholders. An S-Corp’s profits “pass through” to its shareholders and are taxed at personal income rates.

C-Corps are “traditional corporate entities” that shield owners from personal liability for corporate debts. Their profits are taxed at applicable state and federal business tax rates.

Pros and Cons of Each

LLCs, S-Corps and C-Corps all come with distinct pros and cons. LLCs and S-Corps are both subject to taxation on a pass-through basis. This can be good and bad: While individual proprietors and shareholders may enjoy lower tax rates and certain tax breaks, they can also be taxed on profits that they reinvest in the business itself. By contrast, C-Corps can take advantage of tax breaks that may be unavailable to individual filers. Like LLCs, they shield owners from personal liability to a greater extent than S-Corps.

How to Form an LLC or Corporation in Delaware

To form an LLC, S-Corp or C-Corp in Delaware, follow these basic steps:

  1. Choose a name for your business. If you’re organizing as an LLC, you’ll need to include “LLC” in the corporate name. S-Corps and C-Corps aren’t bound by this requirement.
  2. File a certificate of formation with the Delaware Division of Corporations. Depending on your needs, you may have to pay a nominal fee.
  3. Set up a registered agent. If you’re located outside Delaware, you need a registered agent within the state to act as your legal representative in the event of a lawsuit or bankruptcy filing.
  4. Create an operating agreement and fulfill certain legal obligations. Delaware law doesn’t require new business owners to file operating agreements with the Division of Corporations, but doing so could help in the event of future legal action. All registered corporations must also pay an annual franchise tax to remain in good standing.

Pros and Cons of Forming an Entity in Delaware

Delaware LLC or Corporation

Delaware offers some key advantages for proprietors of LLCs, S-Corps and C-Corps. Aside from its annual franchise tax, Delaware levies no corporate income taxes on out-of-state businesses that register with a local agent. Additionally, out-of-state business owners don’t need to pay income or capital gains taxes on profits or stock sales. Delaware also offers a host of legal protections for locally registered businesses.

Finding a Registered Agent in Delaware

During the formation process, prospective business owners can find a list of registered agents on the Delaware Division of Corporations’ website. All agents on this list meet the state’s “Registered Agent Listing Standards.” Since dozens of registered agents operate in the state, competition between agents has reduced the cost of their services.

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David Gass is a serial entrepreneur who has built companies from scratch with less than $200 and grown them to multi-million dollar businesses. He is an expert author and consultant for small business marketing, structuring and financing.

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