Most Common Types of Business Entities in Delaware

Content Team6 minute read11 Aug 2021

Most Common Types of Business Entities in Delaware

There are many different types of business entities in Delaware that can fit your business strategies and purposes. The 2 most common options are limited liability company and corporation. Other available entity types in Delaware are sole proprietorship, partnership (further divided into 3 kinds), statutory trust, and joint venture.

Each type of business entity bears unique attributes, which makes them different from one another. By the end of this blog, you will get more insights to decide the best type of business to register in Delaware.

1. The 2 Most Common Types of Business Entities in Delaware

Let’s have a look at the statistics published by the Delaware Division of Corporations. Overall, there were 226,589 business entities formed in 2019. Among them, limited liability companies (LLCs) and corporations have the largest proportions.

In particular, the number of LLCs accounts for 73%. And right after is the figure of corporations, accounting for slightly above 20%.

These two are most picked due to many reasons. Let’s go over their key attributes and characteristics.

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1.1. Delaware Corporation

business people of corporation discussing about contracts

A corporation is a separate entity in Delaware. It can enter contracts, conduct business, buy and sell property, sue and be sued in its own name. Furthermore, a corporation in Delaware holds its own 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.

For federal tax purposes, a Delaware corporation is classified according to 2 main types (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.

Here is a big NOTE: Corporations with non-U.S.-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.

To raise capital, a Delaware corporation has the ability to 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 the 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 own wrong-doings and others’ as well.

Let’s take a closer look at Delaware corporation by discovering 12 Frequently Asked Questions About Delaware Corporation.

1.2. Delaware Limited Liability Company

sample of llc operating agreement

Limited liability company is the most preferred type of business entity in Delaware. This is because an LLC is a flexible structure.

Similar to a corporation, 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 limited liability in Delaware. Unlike corporations, 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, allocation of profits (and other issues) in an LLC are set forth in an Operating Agreement.

An Operating Agreement is one of the factors that make an LLC so flexible. Each company can create its own Operating Agreement to customize its own governance structure and company rules. The document need not be published and can be kept internally. All members must sign this form of agreement before joining the business.

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.

On the other hand, a multiple-member LLC in Delaware will be taxed the same as a partnership. 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.

Essentially, a limited liability company in Delaware can apply for C-corporation or S-corporation status for federal tax purposes (the two statuses have been mentioned above in the section of corporation). To do this, it needs to file a respective form to the tax authority (Internal Revenue Service – IRS).

To raise capital, 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.

Uncover Delaware LLCs in 8 questions with BBCIncorp to better understand the business entity type.

2. Other Types of Business Entities in Delaware

The following types only account for a very small proportion of total entities formed in Delaware, statistically.

2.1. Sole Proprietorship

man holding light bulb in his hand

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 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.

2.2. General Partnership

A general partnership in Delaware comprises at least two partners (who can be either individuals or other entities). They co-operate 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. In fact, the profits and losses will be passed through to the partners. They, then, will be taxed according to their tax statuses.

2.3. 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 own actions. They do not hold any further personal liability for the partnership as a whole or for other partners’ wrong-doings or misconducts.

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

2.4. 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.

General partners are the ones who take on the management of a limited partnership. In terms of liability, they hold personal liabilities for all the business debt and obligations of the partnership. On the other hand, limited partners are only liable for their capital contributions. They do not participate in the management or daily operation of the partnership.

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

3. Conclusion

LLC and corporation really 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 LLC and corporation 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.

Our experts are always willing to help if you have any questions about Delaware incorporation. Contact BBCIncorp now!

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