Key Takeaways

  • Delaware S Corps and LLCs differ in governance, taxation, flexibility, and investor appeal.
  • LLCs offer greater operational flexibility and fewer formalities, ideal for small businesses or single-member setups.
  • S Corps (through C Corp election) are often preferred by startups seeking outside investment due to their stock structure and investor-friendliness.
  • Tax treatment is a major distinction—LLCs are pass-through by default, while S Corps must elect special IRS status to avoid double taxation.
  • The decision between a Delaware S Corp vs LLC depends heavily on goals related to growth, taxation, liability protection, and ownership structure.

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.

What Is a Delaware S Corporation?

A Delaware S Corporation is not a separate business entity but a tax election made with the IRS after forming a standard C Corporation or LLC. To qualify, a corporation must meet specific IRS criteria and then file Form 2553. Businesses electing S Corp status can pass corporate income, losses, deductions, and credits through to shareholders, avoiding double taxation at the corporate level.

Key eligibility requirements include:

  • Having no more than 100 shareholders
  • Only allowing U.S. citizens or residents as shareholders
  • Issuing only one class of stock

This structure combines liability protection with favorable tax treatment, making it popular among small business owners and startups who want the tax advantages of a pass-through entity.

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.

Taxation Differences Between Delaware S Corps and LLCs

One of the most critical differences in the Delaware S Corp vs LLC debate is how each entity is taxed:

Delaware LLCs:

  • Default pass-through taxation—profits and losses are reported on the members' personal tax returns.
  • No corporate-level tax unless the LLC elects to be taxed as a C Corp.
  • Greater flexibility in allocating profits, which doesn't need to be based on ownership percentage.

Delaware S Corps:

  • Also taxed as pass-through entities but must meet IRS qualifications and file for S Corp status.
  • S Corps allow owners to pay themselves a reasonable salary (subject to employment taxes) and receive remaining profits as distributions, which are not subject to self-employment tax.
  • Cannot flexibly allocate profits—it must be based on stock ownership percentages.

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.

Ownership and Investment Considerations

When comparing a Delaware S Corp vs LLC, ownership rules and investment capabilities are also major points of divergence:

S Corp:

  • Restricted to 100 shareholders, all of whom must be U.S. citizens or residents.
  • Only one class of stock allowed, which can limit complex investor deals.
  • Attractive to early-stage investors and venture capital due to familiarity and the ability to issue stock options.

LLC:

  • No limit on the number or nationality of members.
  • May include individuals, corporations, foreign entities, or even other LLCs.
  • Cannot issue stock, which may hinder equity-based fundraising strategies.

While LLCs offer broader ownership flexibility, S Corps tend to be more structured and investor-friendly.

Shareholders

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:

  1. Shareholders are entitled to one vote for each share in stockholder votes.
  2. 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.

Compliance and Formalities:

LLCs in Delaware are known for their operational ease:

  • No requirement to hold annual meetings.
  • Fewer recordkeeping requirements.
  • Simple to form and maintain with lower ongoing compliance costs.

S Corporations, formed through C Corporations, have more rigorous compliance:

  • Must adopt bylaws and issue stock certificates.
  • Require regular board and shareholder meetings.
  • Subject to stricter documentation and reporting requirements.

This makes LLCs a preferred option for small business owners who value simplicity, while S Corps suit those aiming for eventual growth and external funding.

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.

Liability Protection and Legal Distinctions

Both Delaware LLCs and S Corps provide limited liability protection. This means personal assets of the owners or shareholders are typically shielded from business debts or lawsuits. However, the legal framework and protections vary:

  • LLCs offer flexibility in defining roles and responsibilities in the Operating Agreement.
  • S Corps, by contrast, rely on formal corporate governance laws and must adhere strictly to them.

The legal predictability of corporations—especially in Delaware's business-friendly court system—can be beneficial in more complex business operations or disputes.

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.

Choosing Between a Delaware S Corp vs LLC

To decide whether an LLC or an S Corp is right for your business in Delaware, consider the following:

Choose an LLC if you:

  • Want minimal paperwork and flexible management.
  • Need a structure for a solo venture or small partnership.
  • Prefer profit allocation flexibility.

Choose an S Corp if you:

  • Plan to attract investors or offer stock options.
  • Want to reduce self-employment taxes through salary/distribution split.
  • Are prepared to comply with corporate formalities.

Each structure offers unique advantages depending on your long-term business goals. If you're still uncertain, a qualified attorney can help tailor a solution to your specific needs.

You can find experienced business attorneys on UpCounsel who can assist you in making the best decision for your company.

Frequently Asked Questions

1. Can a Delaware LLC elect to be taxed as an S Corp? Yes, a Delaware LLC can elect S Corp taxation by filing IRS Form 2553, assuming it meets all the eligibility requirements.

2. Do S Corps in Delaware pay state corporate taxes? S Corps typically do not pay federal income tax, and Delaware does not impose a corporate income tax on S Corps that are not doing business in the state. However, they must still file an annual report and pay franchise tax.

3. Which is better for a startup—LLC or S Corp? Many startups prefer S Corps because they allow for stock issuance and can be more appealing to investors, while LLCs offer flexibility and simplicity better suited to smaller businesses.

4. What’s the difference in liability protection between an LLC and an S Corp? Both offer limited liability protection, but S Corps operate under more formal governance structures, while LLCs rely on their Operating Agreements.

5. Can non-U.S. citizens own a Delaware S Corp? No, all S Corp shareholders must be U.S. citizens or permanent residents. LLCs, however, do not have this restriction.

If you need help with deciding whether to form a corporation vs. an LLC, you can post your legal job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.