Delaware C Corp vs LLC: Everything You Need to Know
C-Corporations and LLCs share some similarities, yet they are also quite different. 3 min read
Updated July 13, 2020:
C-Corporations and LLCs share some similarities, yet they are also quite different. C-Corporations require a Board of Directors, while LLCs do not. Also, LLCs can be managed by a single owner and do not require the management structure that a C-Corporation does.
Delaware C-Corp vs. LLC – Everything you Need to Know
Before deciding whether to form a C-Corporation or an LLC in Delaware, you must first consider the scope and nature of your business to determine which business structure is right for your company. There are many benefits to each type of structure, but only you can determine which structure will be the right fit for you.
A Delaware C-Corporation is a taxable business entity or corporation formed in Delaware, while a Delaware LLC is a Limited Liability Company formed in Delaware. These two entities share similarities in that:
- They both require state filing once they are formed.
- Unless otherwise specified, they both exist perpetually.
- Members and shareholders are shielded from personal liability in both types of entities.
- Both entities are without ownership restrictions.
Corporation Governance Structure
There are three tiers of power within a corporation. These three tiers are shareholders/stockholders, directors, and officers. Delaware law governs the power structure and so it is not able to be altered. Delaware law also governs the duties of each tier, along with the relationship between each tier.
A corporation is owned by shareholders and is managed by the directors, while day-to-day operations fall within the power of the corporation's officers. Directors are elected through an annual stockholder meeting.
Classes and Roles Within a C-Corporation
The corporation is incorporated, which means that rights are determined by statute instead of a flexible, private contract. It is possible to have a one-person corporation, although this is also possible in an LLC. Usually, there is just one class of ownership or stockholders, but additional classes can be added through amendments to the Certificate of Incorporation.
It is generally recommended that if there is more than one stockholder that there be a stockholder agreement created. Additionally, if the corporation requires amendments to the number of the authorized shares of stock, this must be accomplished by filing an amendment to the Certificate of Incorporation.
Shareholders are owners of the company. They invest their money in the company by purchasing stock in the company, which gives them ownership. Shareholders, by virtue of owning stock in the company, have two major rights:
- Shareholders are entitled to one vote for each share in stockholder votes.
- Shareholders are able to collect their pro rata share of any dividends in the event the Board of Directors of the company declares that there shall be a distribution of profits, or shareholder dividends.
LLC Governance Structure
One of the other options you have to structure your business is to create an LLC. An LLC is a Limited Liability Company. All members of an LLC sign an agreement, called the Operating Agreement, which governs the business entity. The Operating Agreement of an LLC typically determines the following issues:
- Member interests.
- Capital accounts.
- LLC-specific interests.
- Management responsibilities and rights.
- Capital accounts.
- Procedures and distribution of liquidation rights.
- Contributions to the company.
- Fiduciary duties.
- Allocations of losses and profits.
- Dissolution procedures.
Generally, an LLC is made up of members – owners of the LLC – and one manager. In an LLC, the organizational formalities are more casual than they are in a corporation. Unlike in a corporation, there is no Board of Directors and therefore there are not any Board of Director meetings. Also, there are no state annual reports required to be filed and there is also not a need for formal meetings or meeting minutes of any meetings. There is no requirement for an LLC to comply with a formal management structure, and LLCs can even have a sole managing-member.
The Operating Agreement of an LLC
The Operating Agreement sets forth many of the rules of the LLC. This agreement defines who gets voting rights, whether it is all members, or a specific class of members, or even just on member. The voting rights may be based on multiple factors, such as class, group, financial interest or another basis.
Additionally, the Operating Agreement controls the quorum requirements, as well as any rules pertaining to voting by proxy or any other rule regarding voting rights.
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