LLC vs. Corporation?
Before proceeding to a Delaware incorporator you have to decide what business entity will perform better for you.
Limited Liability Companies (LLC)
A LLC is a corporate structure whereby the shareholders of the company have a limited liability to the firm's actions. Basically, a LLC is a hybrid between a partnership and a corporation.
Therefore a LLC is an unincorporated company formed under applicable state statute whose members cannot be held liable for the acts, debts, or obligations of the company and that may elect to be taxed as a partnership.
The roots of the LLC concept can be found in GmbH companies from Germany. The idea was later adopted by many English-speaking countries because LLCs have some advantages over corporations. Usually people incorporate their business or form an LLC is to protect their personal assets from the claims of the business creditors.
Briefly, LLC benefits are: Simpler to set up, No requirement of an annual general meeting for shareholders, No double taxation, Limited liability, Profits taxed personally, Can be set up with just one natural person involved.
The disadvantages focus on the difficulty of raising capital for an LLC, as investors may be wary of submitting funds to an entity whose liability is limited and the possible lack of any operating agreement requirement can cause problems.
Corporations
Briefly, a corporation is a body that is granted a charter recognizing it as a separate legal entity having its own rights, privileges, and liabilities distinct from those of its members.
Most corporations are businesses for profit; they are usually organized by three or more subscribers who raise capital for the corporate activities by selling shares of stock, which represent ownership and are transferable. Besides business corporations, there are also charitable, cooperative, municipal, and religious corporations, all with distinctive features.
Focusing only on business corporations, we distinguish two types: C-Corp and S-Corp.
C-Corp is the most common form of corporation, the C-corporation has few ownership restrictions and must pay corporate taxes; all publicly traded corporations have C-corporation status. C-corporations pay income taxes just as an individual does, and C-corporations do not receive a deduction on dividends they pay to stockholders. This leads to the so-called "double-taxation" of corporate profits: a given profit becomes subject to income tax twice, once at the corporate level, as an item of income, and once at the stockholder level, as a dividend.
S-Corp are commonly used by small business proprietors, the S-corporation pays no corporate taxes, but instead passes profits and losses directly to its owners (the stockholders) who declare such profits and losses as part of their personal taxable income. In this manner S-corporations resemble partnerships, although some subtle differences in taxation exist. As a result, S-corporations do not become subject to the "double-taxation" that C-corporations enjoy. However, not all corporations qualify for S-corporation treatment. An S-corporation must generally have no more than 75 stockholders, all of them natural persons (not other corporations or entities), and all of them residing in the United States; moreover, the S-corporation can only issue a single class of stock.
Which one to choose?
It is a difficult task to easily determine what is best for you. Generally you should focus on the above guide lines and then bring in computations you business plan. If you have any doubts regarding the right company formation you should consider consulting a businesses or legal advisor. Keep in mind that each case is different than the other and also the company you build today may not look the same after a year.
Next reading: Costs of Delaware incorporation?
