Delaware LLC vs C – Corp

The Definitive Guide for Startups

So you are working on your new startup and you have your business plan , the money you are going to invest in your business and even figured out operations and marketing.

But some question remain.

What sort of business entity to form (LLC / C-corp/ S-corp) and where?

Many startups and VC funds favor Delaware to form a company.

In this article I will let you know:

  • What are the benefits of forming a company in Delaware?
  • What are the disadvantages of forming a company in Delaware?
  • Should you form an LLC or a C Corp or an S Corp? 
  • How can you form a company? What are the costs involved

Note: This is not a legal advice and I am not a lawyer, please consult your lawyer before taking any decisions.

Benefits of forming a company in Delaware

Delaware has a reputation for being liked by startups and Venture Capital funds for the following reasons:

  1. Corporate Law
  2. Privacy
  3. Startup costs
  4. Tax purposes
  5. Few formalities
  6. Easier to raise investments
  7. Structure

Corporate Law

Delaware has a special court of Chancery for law disputes and strong protections for companies that are incorporated in Delaware.

The outcome of cases in Delaware is more predictable because of the following reasons:

  1. A large volume of cases are recorded in Delaware hence there is a large base of precedents that can be looked into and hence there is less uncertainty if there is a case filed against your firm.
  2. Delaware special court of chancery has judges with corporate law backgrounds, hence cases are decided quickly and with justly as compared with courts where judgment is in the hands of ill experienced juries.
  3. As more than 60% of fortune 500 companies and a large number of private and public enterprises are incorporated in Delaware, more corporate attorneys are familiar with the Delaware laws and it’s more convenient to hire a lawyer.

Privacy:

You don’t have to name your shareholder’s officers and directors publicly. Only in the case of law enforcement you need to release these names. Hence it provides a layer of privacy.

Startup costs

There are minimal startup costs in Delaware. In Delaware, you can easily maintain an LLC with $300 in yearly costs and a C corp with $800 in approx yearly costs.

If you are forming a C corp. even a single person can perform multiple roles of the shareholder, officer, and director. In other states, you need at least 3 people.

Tax Purposes

Following are the tax benefits of incorporating the company in Delaware:

  1. There are no corporate taxes in Delaware if you do business in another state.
  2. There are no royalty payments or taxes on intangible assets such as patents.
  3. There are no taxes for non-resident individuals or entities (that is if you don’t reside in the forming a don’t do the business in Delaware you don’t need to pay income taxes, sales tax or any other kind of tax)

Investment

Many investors and Venture capitalists prefer Delaware because of they are familiar with the business laws hence it is easier to get an investment in your firm if you are registered in Delaware as compared to other places.

Disadvantages of forming a company in Delaware:

Drawbacks start when you are incorporating in Delaware and aren’t actually doing any business in Delaware. If you do that you will need to re-register the company as a foreign entity in the state in which you are actually doing the business.

Hence now you will have to do 2 filing instead of one and you also need to hire an agent and pay annual fees to them to pass on the legal notices and formalities for you.

Difference between an LLC s and a C – Corp

In Delaware and in fact anywhere in the United States, the most used types of corporations are LLCs and C-Corps.

What is an LLC?

An LLC is a type of company which is organized in an operating agreement.

An LLC is organized as a contract between members(owners) stating how it will be run and how the income and liability will be split between the memebers.

A few common characteristics of LLC:

They are designed to provide a corporate veil and a limited liability to the founders. That is moving liabilities, debts and obligations from the owners to the company to the company itself

LLC provides pass-through taxation that is generally the owners pay personal income taxes on the income earned by the business.

Formalities that are required by corporations such as board meetings, corporate resolutions directors issuing stock and drafting bylaws are eliminated. The LLC is governed by the contract between its partners, the contract itself is not required to be disclosed to the public hence it is easy to maintain and operate.

LLC can also be easily converted into a c corp. Converting a Delaware LLC to a Delaware corporation is straightforward and common enough that only a few forms are required to be filled to complete the process.

How to form a Delaware LLC: 

Forming a Delaware llc is quite easy you just require 2 things:

  1. Filing a certificate of formation
  2. Documenting your operating agreement

Before filling for the certificate of formation you must decide on a name for your firm and check for conflict with the Delaware Secretary of State. It can easily be done online.

Delaware does not require you to publicly release your name while filing for the certificate of formation, but you can include it if you wish to.

A certificate of formation must include:

  1. The name of the LLC
  2. The name and address of the registered agent
  3. The signature if the authorized individual

Delaware registered agent requirement:

You can form a Delaware LLC without visiting opening an office or maintaining a bank account in Delaware. However, the Delaware state act requires you to have an agent if you do not have an office in Delaware. You can hire one of the many agents available online just search for a Delaware registered agent, they charge anywhere between $120 to $300 per year and forward any document and legal stuff that the state sends you

Delaware C corp:

A corp is a full-blown corporation, they have shares and can also be listed publically and traded in the stock exchange

C corps are designed to be an abstraction between the operators of a business and owners of a business which may  or may not be operationally involved

Owners are called as shareholders and ownership is tracked by shares i.e more percentage of shares a person has. a more economic entitlement as well as the operational control they have over the company.

Characteristics of C-corp

Corporations are intended to provide limited liability to the shareholders. Shareholders are not liable for the debts and the of the company. If they have invested money in the company they can only lose the amount they have invested and nothing other than that

As a corporation, it is taxed separately from its owners i.e the shareholders. The corporations have extensive filing obligations, plus the shareholders are taxed again on their income.

Feasibility and suitability

LLC is the best choice if you wish to have a side project or have a bootstrapped company

LLCs are well suited for these companies because Intellectual property can easily go from members (owners) to LLC and vice versa plus there is minimal paperwork and hassle.

On the other hand C corporation requires a lot of ceremony for example s shareholder resolutions and meeting before Intellectual property can be transferred plus it is a big hassle, and time, as well as money, is required to run a C corp as compared to an LLC

International Owners

While the United States or Delaware does not impose any restrictions on citizenship or permanent residents for owning an LLC or a corporation. Owning a LLC for non residents noncitizen of the United States might

complicate the matters Non-resident owners of the  LLC in the United States are obligated to file income tax returns for income their LLC’s earn

For example, if a non-resident is an owner of an of an LLC in the United States. They will have to pay taxes in the United States for the income earned by the LLC and might have to pay taxes in the home country as well ( depending on the laws of the home country) thus resulting in double taxation.

Investment

Many venture capital firms and investor prefer c corps because the flexibility accorded with LLC require’s them to do extensive legal due diligence before investing and many do not prefer expensive legal work as a requirement to of in a company.

C corp is a corporation with standard laws and terms. So many investors prefer and require companies to be converted into C-corps before investing.

this article is written by Mohammed Lakkadshaw who is a javascript and Node JS developer. I am available for freelance work. I am neither attorney nor accountants, and this information should not the be considered either legal or accounting advice.

Tax loopholes while forming a Corp as a startup 

Thers is a lot of flxibility for planning your taxes in the c copr. A LLC will have to wait a few years to take advantage of tax benefits but an C copr can enjoy its benefits in the first year itselfd

These benefits are called as fringe benefits. What fringe benefits mensa that a company can give its employees benefits and deduct them as expenses for tax purposes.

The only condition is that the benefits must be for an array of employees not just the owners but if the only employees are owners, the owners can take benefit of this. these benefits can pay for health insurance or disability insurance of employees

In additionof owners pay themselves salaries, these salaries can be deducted from the c corps profits as running expenses plus c corp can retain earnings for future expansion as long as it complies with the appropriate tac provision s

C corp can deduct all business expenses such as cost of goods sold fringe benefits, salaries etc after all these, there is little income left to be taxed

C-corp also face lower taxes  on retained earnings  this is unique to C corps of the owners can use the tax savings to further expand their company