Types of Entities

Although there are a number of different types of entities under which you may run your business (such as sole proprietorship, general partnership, limited partnership, limited liability partnership, "S" corporation, etc.), the corporation and the limited liability company or LLC are by far the most popular.

Primary Differences

Both the corporation and the LLC offer their owners limited personal liability.  The primary difference between a corporation and an LLC is that the corporation is a separate taxpayer, whereas the LLC, like a partnership, is merely a conduit for the owners of the company who are the taxpayers.  Sole-owner LLCs are treated like sole proprietorships for tax purposes, while providing limited personal liability.

Formation of Corporations and LLCs

Delaware corporations and LLCs must be formed by submitting a Certificate of Incorporation or Certificate of Formation to the Secretary of State along with the required filing fees.  Only one person is needed to form either type of entity.  Both types pay an annual fee to the State of Delaware.  The current annual fee that applies to the vast majority of corporations with issued shares of 5,000 or less is $50 for the annual report fee, plus an annual tax of $175 for a total of $225 per year.  The current annual fee that applies to LLCs is $300.

Recordkeeping and Officer Requirements

Corporations are required to have one or more shareholders (unless not for profit), one or more directors, and a president, treasurer and secretary (who may all be the same person).  The shareholders of a corporation elect the directors and the directors appoint the officers.  The officers carry on the day-to-day business of the corporation while the directors and shareholders do not take part in that, as such. The basic rules for the operation of a corporation are set forth in the corporate "by-laws."  Both corporations and LLCs should maintain records ("minutes") of meetings wherein business decisions are made at least annually, such as the elections of directors, appointment of officers, etc.  There are fewer recordkeeping requirements in operating an LLC.  The owners of an LLC are called "members" (like partners in a partnership or shareholders in a corporation).  The members may manage the LLC directly or they may appoint a manager, in which case the manager is responsible for the day-to-day activities.  The manager may or may not be a member (just as the officers of a corporation may or may not be directors or shareholders).  The management of an LLC may choose to use officers such as president, secretary and treasurer.  The internal rules for operating an LLC are set forth in an "operating agreement".  Like corporations, LLCs can be owned and operated by one person.