Top 4 Delaware Business Entities That You Should Know

What is a Delaware limited liability company?

A limited liability company is a preferred type for Delaware business entities. This is because an LLC is a flexible structure. According to the Delaware Division of Corporations, there were 336,407 business entities formed in 2021 and the number of LLCs accounts for 20.8%.

An LLC in Delaware is a distinct entity, which has a separate status apart from its members. In most cases, the members or managers of an LLC hold no personal liabilities for any debt or obligation of the business.

As for the governance structure, one member is enough to register and run a Delaware limited liability company. The members of an LLC can manage the company by themselves or hire an external manager to take on the job. In an LLC, there is no statutory requirement for a Board of Directors.

There is one key attribute that you should bear in mind. The members’ relations, duties, interests, rights, responsibilities, and allocation of profits (and other issues) in an LLC are set forth in an Operating Agreement.

The members need to invest more money in the LLC. LLCs cannot sell stock to the public. In return for this inconvenience, an LLC in Delaware does not need to submit annual reports. No names or addresses of the members and managers will be publicly disclosed. Hence, better privacy is secured.

There are three common types of LLC business structures.

Single-member LLCs

Single-member LLCs are a popular business structure for small businesses and entrepreneurs. An LLC with only one member is still considered a separate entity for the purposes of employment tax and certain excise taxes. For federal tax purposes, a limited liability company in Delaware can be taxed in many ways. A single-member LLC will be considered a “disregarded entity” for tax purposes. This means all the profits, losses, and tax liabilities will be channeled to the sole member.

Multiple-member LLCs

These businesses are formed in the same way as single-member LLCs. Multiple-member LLCs also have different tax rules than single-member LLCs. The IRS treats multi-member LLCs as partnerships, which means that the LLC itself is not taxed on its income. Instead, the owners of the LLC are taxed on their share of the LLC’s income. Generally speaking, there is no tax at the corporate level. All the profits and losses will be attributed to the members. The profits will then be taxed according to the members’ tax situations.

Series LLCs

A Series LLC is formed in the same way as a traditional LLC, by filing articles of organization with the state in which the LLC will be registered. Once the Series LLC is formed, the members can then create one or more separate series within the LLC. Each series can have its own assets, liabilities, and business purposes, and is treated as a separate entity for tax purposes.

What is a Delaware corporation?

A corporation is a separate business entity in Delaware. It can enter contracts, conduct business, buy and sell property, sue, and be sued in its own name. Furthermore, Delaware corporation holds its liabilities for any arising debts or obligations. The shareholders of that corporation will not hold any personal liability that goes beyond their capital contributions.

The governance structure of corporations is strictly regulated by the Law of Delaware Corporation. In a Delaware corporation, there are 3 classes of members: shareholders, directors, and officers. The relations, duties, and rights of each class are also mainly regulated by state laws.

In most cases, shareholders do not manage the corporation (unless it is a “close corporation”). The shareholders will be able to approve certain transactions and have the right to elect a Board of directors. The directors will further appoint officers to help them run the company on a daily basis. There is no residency requirement for these positions.

To raise capital, a Delaware corporation can go public. They can issue and sell stocks to attract new investors. Partly due to this, a corporation in Delaware is required to hold meetings (which can be held outside of Delaware), keep records of minutes, and file annual reports to the state.

“Professional corporation” is one special type of corporation in Delaware that is worth mentioning. As its name suggests, this type is only for professionals (such as accountants, doctors, and attorneys). One key feature is the shareholders can become the directors. The shareholders hold personal liabilities for their wrong-doings and others as well.

There are five common types of Delaware corporations.

C-corporation and S-corporation

By default, a corporation is considered a C-corporation. It will be taxed according to the corporate income tax. And if it pays dividends, the shareholders will further be taxed on those dividends, according to personal income tax.

To avoid that, a corporation can apply for S-corporation status, however, only when it has no more than 100 shareholders. In addition, corporations with non-US-resident owners are not liable for S corporation status.

If approved, the corporation will no longer be taxed at the corporate level. The tax liabilities will “pass-through” to the shareholders. The shareholders will be taxed according to their proportions of shares in that corporation.

Non-profit corporation

This is a charitable organization that does not distribute its surplus funds to owners or shareholders. Non-profits can be either private or public charities, and they are exempt from federal income tax. Non-profits must use their surplus funds to further their charitable purpose. Some common types of non-profits include educational institutions, religious organizations, and charitable foundations.

The non-profit corporation must file an annual report with the Delaware Division of Corporations. The report must include information about the organization’s finances, activities, and governance.

Public benefit corporation

A Public Benefit Corporation (PBC) must have a purpose that is beneficial to the public, such as promoting economic development or providing social benefits. They are also required to consider the impact of their decisions on stakeholders, including employees, customers, and the environment. In addition, public benefit corporations are held to a higher standard of accountability than traditional businesses.

Close corporation

A close corporation is a type of Delaware business entity that is owned by a small number of shareholders. Close corporations are not required to have a board of directors, and they are not publicly traded. Close corporations are often family-owned businesses.

Only certain business types are eligible to incorporate as a close corporation. These include professional corporations, personal service corporations, and business trusts. Close corporations are also subject to some additional requirements, such as having a maximum of 30 shareholders and having all shareholders be residents of the U.S.

What is a Delaware partnership?

General partnership

A general partnership in Delaware comprises at least two partners (who can be either individuals or other entities). They cooperate mainly to generate profits. Each partner is an agent for the partnership as well as for other partners. The partners’ liabilities and duties are heavily bound to the general partnership. In particular, all partners will hold personal liabilities for the business debts and obligations of the partnership, and for each other’s actions as well.

The partners also manage the general partnership in Delaware. In most cases, business decisions will be made based on the agreements by most partners. That said, there must be a written agreement to specify the partners’ rights and obligations in the partnership.

For taxation, a general partnership in Delaware is not taxed directly. The profits and losses will be passed through to the partners. They, then, will be taxed according to their tax statuses.

Limited liability partnership

A limited liability partnership (LLP) in Delaware is like an upgrade of a general partnership. The key difference is that the partners in an LLP hold limited liabilities only for their actions. They do not hold any further personal liability for the partnership as a whole or other partners’ wrong-doings or misconduct.

Everything else, including taxation, is the same as a general partnership. Everything should be also carefully noted down and stated in the partnership agreement.

Limited partnership

The structure of a limited partnership in Delaware is a little bit more complicated than the two types above. There are two types of partners in a limited partnership in Delaware: general partners and limited partners. To form a limited partnership, there must be at least one general partner and one limited partner.

For taxation, a Delaware limited partnership is treated the same as a general partnership.

What is a Delaware sole proprietorship?

This is the simplest form of business in Delaware. It is easy to set up, operate, and close down. The business is owned by a sole individual. The owner (also known as the sole proprietor) only needs to register a business name and obtain the necessary licenses to start the sole proprietorship.

A sole proprietorship in Delaware has no separate legal status. The owner will hold full liabilities for all debts and obligations of the business. This is the biggest disadvantage when running a sole proprietorship.

Conclusion

LLCs and corporations stand out from all types of business entities in Delaware. They are great vehicles for the separation between personal assets and business assets.

The taxation of both LLCs and corporations in Delaware is flexible. Especially with an LLC, you can avoid double taxation and even be exempted from U.S. taxes. It is quick to set up and easy to maintain an LLC in Delaware.

Should you have any questions, or concerns, or simply looking for some practical advice on a Delaware business entity, our friendly consultants are always willing to help. Feel free to contact us or drop a message via service@bbcincorp.com.

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