What you need to know before you form your company in Delaware.
Limited liability companies (LLCs) and C Corporations are the primary corporate entities in the United States for doing business.
A C corporation is an entity designed to act as an abstraction layer between the operators of the business and the owners of the business, who may or may not be operationally involved. Ownership is tracked by shares, with each share corresponding to a defined portion of control of the business and entitlement to the economic upside of it. Owners are called shareholders.
Many companies which are household names are C corporations; one can own shares at Google without having any responsibility for working there. This assumption that control and ownership may be separate flows through the mechanics and regulation of C corporations. The state of Delaware has a highly developed body of law governing corporations which can lead to a high degree of predictability in the event of a legal dispute.
An LLC is a type of company organized under an Operating Agreement, which is a contract between the owners (called "members”) specifying how it will be run and how the economic burdens and returns will be split between the partners.
The possibilities for how to structure an LLC are almost endless, which can be a blessing and a curse. This makes interfacing with an LLC challenging, because one has to examine the Operating Agreement (and potentially other contracts signed between the members) to get a handle on how the company is governed. C Corporations, by comparison, are more standardized: they share commonalities like stock to represent ownership, governance by a board of directors, day-to-day operations handled by officers, etc.
LLCs are considered pass-through entities for the purpose of US taxation; they don’t file taxes in their own right, but have their income reported on the personal income tax returns of their owners. C corporations file their own tax returns. Money flowing through an LLC is taxed at the level of the owners of the LLC; money flowing through a corporation is taxed at both the corporate level and, additionally, when it passes to the owners (either as salary or as a distribution of profits).
The different tax treatment of these entities can have interesting implications, particularly if the company is making losses, as many companies do early in their lives. A C corporation which makes a loss in any given year generally carries the loss against future tax years, where it can be used to offset future profits. A loss earned by an LLC may generally be used to offset income of the owners during the same tax year, for example, income from employment.