Should I Form a Delaware LLC or Corporation?
Choosing Between a Delaware LLC and a Delaware Corporation
The "Limited Liability" of Both Entities
The owners of a sole proprietorship or general partners of a partnership are not protected from the judgments against and liabilities of the business or from the acts of their business partners.
The stockholders of Corporations and members owning units in Limited Liability Companies (LLCs), on the other hand, benefit from "limited liability." In other words, their liability is limited to their investment in the stock of the Corporation or in the units of the LLC.
Why Choose a Delaware LLC?
Simple LLC Tax & Legal Explanations
A Delaware LLC gives the greatest tax flexibility. The Delaware LLC operating agreement includes management provisions and buy-sell provisions, making the LLC a popular entity to own real estate, boats and airplanes and a popular entity for foreign citizens to render services or sell products.
A one-member Delaware LLC starts out being taxed as a sole proprietorship. All income and expenses "pass through" to be reported on schedule C of the individual tax return of the member. No EIN (Employee Identification Number) is necessary.
A multi-member Delaware LLC starts out being taxed as a partnership that needs to apply for an EIN on Form SS-4. Each year, a Form 1065 Partnership Return needs to be filed with a Form K-1 for each member listing the income or losses to be reported by each member.
The main disadvantage for owners of a Delaware LLC that is taxed as a sole proprietorship or partnership is that all taxable income, which passes through to the owners, is treated as "earned income" and is subject to employment taxes. Therefore, the 15.3% Social Security-Medicare rate applies to the first $90,000 of earned income and the 2.9% Medicare rate applies to all earned income over $90,000.
Why Choose a Delaware Corporations?
Simple Delaware Corporation Tax & Legal Explanation
A Delaware Corporation is controlled by a majority of its stockholders. A Delaware Corporation needs to obtain an Employer Identification Number (EIN) and file a U.S. Corporation Income Tax Return each year.
A Delaware Corporation starts out as a "C" Corporation for tax purposes. This means that the taxable income (after deductions for salary, business expenses and depreciation on furniture and equipment) is taxable to the Corporation. The Corporation would only be taxed on income "effectively connected with the United States." The beginning corporate tax rate of 15% applies to the first $50,000 of Corporation taxable income each year.
The low 15% tax rate is only available to a Delaware Corporation rendering personal services if a person who is not employed by the Delaware Corporation owns at least 6% of the issued stock of the Corporation. Otherwise the top personal tax rate would apply to the taxable income from personal services in the Corporation.
A Delaware Corporation owned by one or more U.S. citizens or permanent residents may file a Subchapter "S" Election with the Internal Revenue Service on Form 2553 within 75 days after either the date of incorporation or the beginning of a year. The "S" Election will cause the taxable income of the Corporation to be passed through to be taxed to the Corporation’s stockholders in proportion to their stock ownership.
For personal service, please feel free to call our Incorporation Specialists on our toll-free line (800) 759-2248 if you have any questions.
Or, for more information, please visit our website at http://www.incnow.com
