Should a small online vendor incorporate as a LLC, S-Corp or C-Corp?

Thank you for your question. First, this response will provide a brief synopsis of the benefits and drawbacks that come with forming an LLC, S-Corporation, and C-Corporation. Second, this response will provide rough guidelines on how to form an LLC in Delaware.

Limited Liability Company (LLC) form permits you to shield personal assets from business liability, requires you and your fellow owners to maintain separate business and personal account records, can be formed in all fifty states and the District of Columbia, provides you with a highly flexible management structure, has flexible tax reporting options, and are usually preferred by outside investors.

An LLC will be ideal if your startup company anticipates losses for at least two years and you want to be able to pass the losses through to yourself and the other owners, you want a flexible choice of accounting methods, or your business will own real estate.

S-Corporation and C-Corporation refers to your firm’s tax status. An S Corporation is considered a pass-through entity, which means the business itself isn’t taxed. Instead, income is reported on the owners’ personal tax returns. S Corporations are ideal for firms that want to minimize Social Security and Medicare salary taxes, use cash accounting methods, and lower IRS audit risk.

Businesses taxed as C corporations are not pass through entities, cannot have more than 100 shareholders, and can only be held by U.S citizens. Income is taxed at the corporate level, and, if dividends are distributed, income is also taxed at the individual level as well. C Corporations provide their shareholders with limited liability and are ideal for firms that want to obtain venture capital financing, have flexible profit sharing rules, want to retain earnings, minimize social security and Medicare salary taxes, provide substantial fringe benefits to employees, own real estate, or lower IRS audit risk.

If you want to form a Delaware LLC all you need to do is:

(1) Come up with an LLC name. Under Delaware law, an LLC name must contain the words “Limited Liability Company” or the abbreviation “L.L.C.” or “LLC.” In addition, the name can contain the names of members, or the words “Club,” “Foundation,” “Fund,” “Institute,” “Society,” “Union,” “Syndicate,” or “Trust.” Your LLC’s name must not be deceptively like the names of other business entities already on file with the Delaware Secretary of State. Names may be checked for availability by searching the Department of State: Division of Corporations business name database. You can also reserve a name for a fee.

(2) Appoint a Registered Agent.

(3) File a certificate of formation that includes the LLC’s name and the name and address of the LLC’s registered agent. The filing fee is $90.

(4) Pay an annual $300 alternative entity tax and obtain an IRS Employer Identification Number. Unlike many states, Delaware does not have annual filing requirements for LLCs.

Need assistance registering your corporation in Delaware? The corporate attorneys at LawTrades can walk you through the process at an affordable flat rate. Message me for more details.