Delaware Corporation vs. LLC: Costs, Taxes, & Compliance

Delaware is called America’s corporate capital, hosting over 1.9 million business entities. These firms include more than half of all public companies in the U.S. and 66% of Fortune 500 companies.

You can join these businesses as a corporation or an LLC, although choosing the best structure between these two comes first. That’s why NCH has written a comprehensive guide to help you make the right decision. Below, we compare and discuss the advantages and disadvantages of Delaware corporations and LLCs.

Key Takeaways

• Delaware corporations and LLCs have different formation requirements and expenses. Both business entities are required to file formation documents with the Delaware Division of Corporations and can incur other expenses such as registered agent fees.
• A C corporation is taxed once at the entity level and again at the shareholder level. Conversely, an S corporation and an LLC pass their profits and losses to their owners’ personal tax return.
• Corporations have directors and officers, while LLCs can be managed by their owners or other authorized individuals.
• When it comes to compliance, LLCs follow fewer corporate formalities than corporations. The latter is subject to stricter requirements.
• Corporations can issue multiple classes of stock, making them attractive to potential investors. Getting external funding is challenging for LLCs because they only issue one class of stock.

Formation Requirements & Costs

To start, let’s discuss how Delaware corporations and LLCs are formed. Both business entities are required to register with the state’s Division of Corporations. You only need to file a Certificate of Incorporation or Formation online or mail a completed paper form to the Delaware Division of Corporations.

The filing fee for the Certificate of Incorporation starts at $109 for most Delaware corporations. This cost can increase or stay the same, depending on how much stock the corporation holds. Exempt (domestic) corporations pay a fixed filing fee of $109.

For domestic LLCs, filing a Certificate of Formation costs $110.

Other Requirements & Expenses

To stay compliant with Delaware’s legal requirements, corporations and LLCs must appoint and maintain a registered agent. This person or business must be allowed to conduct business in the state and have a physical address there. Professional registered agents charge varying fees for their services.

If you’re operating a Delaware corporation, you’re required to establish corporate bylaws, hold an initial meeting, and keep detailed records about your operations. You can use corporate record books and templated certificates and documents that can cost between $200 to $500.

Conversely, a Delaware LLC has fewer compliance requirements. It doesn’t need to specify the number of stocks held by each owner in its formation documents nor conduct formal meetings. However, all LLCs must maintain detailed business records for legal protection and fewer operational issues.

Drafting an operating agreement also comes highly recommended for LLCs, with costs ranging from $0 to an average of $570 or more for professional services.

Tax Structure

Taxation is another key difference between Delaware corporations and LLCs.

If you operate as a C corporation, you’ll face double taxation. Corporate profits are taxed at the entity level, and shareholders pay personal income taxes on dividend distributions. Despite this disadvantage, C corporations retain their earnings with a lower corporate tax rate.

S corporations and LLCs have a pass-through tax structure. Their profits, losses, and deductions flow directly to personal tax returns, bypassing double taxation. However, LLC owners may owe self-employment tax on their net earnings. S corporations save on this tax if they pay their owners a reasonable salary that’s subject to payroll taxes.

Related Resource

Read NCH’s guide to the differences between pass-through taxation and corporate taxation.

Organizational Structure

Delaware corporations and LLCs also have different organizational structures.

A corporation’s management consists of a board of directors, with all of its members elected by the company’s shareholders. Directors then appoint officers to handle the corporation’s day-to-day operations. Generally, these individuals include:

• A president or CEO (chief executive officer) focused on executive functions
• A secretary who maintains corporate records
• A treasurer with financial oversight

On the other hand, a Delaware LLC can be member-managed or manager-managed. Member-managed LLCs have all of their owners operating the business. Conversely, manager-managed LLCs designate selected individuals to manage their daily operations.

Ongoing Compliance Obligations

Throughout a Delaware corporation’s lifetime, it must follow strict corporate formalities. These procedures include annual shareholder meetings and proper record-keeping.

For the latter, a corporation must:

• Maintain detailed minutes of corporate meetings.
• Draft board resolutions.
• Ensure that shareholder registers, stock transfer ledgers, and corporate bylaws are updated.

Additionally, public corporations must meet the Securities and Exchange Commission’s reporting requirements. Private corporations don’t have to do so, but they must keep copies of comprehensive business documents.

If you form a Delaware LLC, you have fewer compliance obligations to fulfill. However, it’s best to draft and implement an operating agreement to avoid potential disputes and other operational issues.

State Franchise Taxes & Annual Fees

In Delaware, all registered corporations must file an annual report and pay a franchise tax. Both are required for non-exempt corporations.

Exempt Delaware corporations only pay $25 for filing their annual reports, whereas non-exempt corporations pay $50. The state’s franchise tax starts at $175 for corporations owing $200,000 in taxes.

Conversely, Delaware LLCs aren’t required to file annual reports. Instead, these entities pay an annual tax of $300, regardless of their revenue, assets, or membership size.

Related Resource

Find out how much a Delaware LLC pays in taxes here.

Potential Opportunities to Raise Capital

Most of the time, corporations get substantial amounts of venture capital. These businesses attract investors with multiple classes of stock, convincing them to fund their operations.

In contrast, LLCs only issue one class of stock. As a result, they have a harder time looking for investors. If an institutional investor does decide to fund an LLC, they may request changes to the venture’s operational structure.

How to Choose the Right Business Structure

Ultimately, your choice of business structure depends on several factors.

Before you start a business in Delaware, think about your short-term and long-term goals for your business. Do you want to keep more of your future profits? Are you looking for investors? Asking these questions and more will help you make a good decision.

Related Resources

• Learn the differences between corporations and LLCs from NCH’s Cort Christie.

• Find out what makes Delaware a top choice for LLC formation and business incorporation.

Frequently Asked Questions

How much does it cost to start & maintain a business in Delaware?

The costs of starting and maintaining a business in Delaware vary depending on its business structure.

• Delaware corporations can pay $109 or more for filing a Certificate of Incorporation.
• Delaware LLCs pay $110 for filing a Certificate of Formation.
• Other expenses include service fees for registered agents and annual franchise taxes (their total costs vary).

How does Delaware’s franchise tax affect my annual business costs?

If you’re starting a corporation, Delaware’s franchise tax can increase its annual costs. The minimum tax rate is $175 for corporations owing $200,000 in taxes.

Conversely, Delaware LLCs pay an annual tax of $300. It can keep your annual business costs low.

Can I convert an LLC into a corporation if I’m attracting investors?

Yes, you can convert an LLC into a corporation if you’re attracting investors. However, this process can create significant tax implications. And once your business becomes a corporation, it must meet stricter requirements. Converting an LLC into a corporation works best if an investor requests it.

Which business structure offers better tax advantages?

LLCs offer better tax advantages, thanks to its pass-through tax structure. They’re not taxed at the corporate level; instead, their profits and losses are carried over to personal tax returns.

Meanwhile, corporations face double taxation but can retain earnings at a lower corporate tax rate.

Do corporations & LLCs have ongoing compliance obligations?

Yes, corporations and LLCs have ongoing compliance obligations.

Delaware corporations must hold meetings with shareholders and board of directors, draft board resolutions for major business decisions, and keep detailed corporate records. Delaware LLCs don’t need to follow these formalities, although proper record-keeping and having an operating agreement are highly recommended.

How does a Delaware corporation attract investors?

A Delaware corporation attracts investors by issuing multiple classes of stock. This comes with specific rights and options to liquidate or convert stocks.

Furthermore, Delaware corporations have a more formal organizational structure. Potential investors may request this from LLCs.

Which business entity is easier to manage in the long term?

An LLC is easier to manage in the long term because they follow fewer corporate formalities and offer more operational flexibility.

In contrast, a corporation must adhere to stricter requirements, including formal meetings and federal reporting requirements. LLCs work best for owner-operated or closely held businesses.

Does Delaware protect the privacy of business owners?

Yes, Delaware protects the privacy of business owners. The state doesn’t require LLCs and corporations to include the names of their owners, managers, directors, or officers in their formation documents. Both entities can also use registered agents to protect their owners’ privacy.

Can a Delaware LLC issue equity?

A Delaware LLC can’t issue equity. Rather, it sets ownership interests in the business. Corporations allocate equity when offering stock options, preferred shares, or multiple investment rounds. All three make corporations the perfect business to start.

How challenging is it to dissolve a Delaware corporation?

Dissolving a Delaware corporation is extremely challenging. At most, the business must pay any outstanding franchise taxes and get approval from the board of directors and shareholders.

If an LLC decides to close, it follows specific procedures outlined in its operating agreement. These protocols include member voting and asset distribution.

Expert Tips From NCH

1. Before opening a Delaware corporation, learn how to calculate its annual franchise tax. You can use the Authorized Shares or Assumed Par Value Capital method.
2. Consider your business funding options when choosing between an LLC or a corporation. LLCs are ideal if you’re bootstrapping (funding the company with personal finances).
3. Allocate a part of your budget for formation and maintenance costs. It’s especially important for corporations subject to Delaware’s franchise tax.
4. If you’re forming an LLC, get expert advice on potential tax classification elections. A trusted tax professional will help you understand the implications of corporate taxation on LLCs.
5. Start keeping copies of detailed business records upon formation. Store them in a secure yet accessible location.

Choose the Right Structure for Your Business

Delaware lets business owners form corporations and LLCs. However, starting any of these entities comes with different benefits and drawbacks.

Before making your final decision, compare these differences and consider the advantages of opening a business in states like Nevada. NCH’s business formation experts will discuss both with you to help you take the next step.

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.