Business Corporation or LLC?
The first considerations that we’re going to talk about are the setup and maintenance costs for establishing a business entity. For the purposes of this video, we’re going to assume that you’re forming that entity in Delaware, which, of course, is the jurisdiction of choice for most early-stage companies. You may, of course, be based in a state other than Delaware. In fact, chances are you aren’t based in Delaware physically. So for an example, we’ll assume that you’re based here in Massachusetts, where I work, but you’re a Delaware entity.
Costs for Establishing a Corporation
If you’re a corporation, you’re going to pay a filing fee. This isn’t a lawyer fee; this is just an administrative fee of $500 to file a charter with the Delaware secretary of state. You also will have to foreign qualify as a corporation doing business in the Commonwealth of Massachusetts. The secretary of the Commonwealth of Massachusetts will also charge you $500 for that filing.
Costs for Maintaining a Corporation
Once you form the entity, from a maintenance standpoint, as a corporation in Delaware you’re going to have to pay an annual service fee of $145 and you’re also going to have to file what are called annual reports in Massachusetts of $125 a year. Last but not least, you’ll also have to file annual franchise taxes in Delaware. It’s hard to ascertain exactly what those taxes will be because it really varies based on the authorized share capital and assets of the corporation, but all together the formation of the corporation is going to be about $1,000 for a Delaware corporation that’s foreign qualified to do business in Massachusetts. Then, on a going-forward basis, you’re going to have service fees of about $500 a year, but again, it could be more based on your annual franchise taxes.
Costs for Establishing an LLC
Conversely, it’s a little more expensive to form limited liability companies. The formation of a Delaware limited liability company is actually, as of today in early 2017, the same cost as a charter for a Delaware corporation—about $500. And in the scenario where you’re a Delaware entity doing business in Massachusetts, to foreign qualify as a limited liability company in Massachusetts the cost is going to be $620. So while these costs not measurably more expensive than a corporation, they are still slightly more expensive.
Costs for Maintaining an LLC
From a maintenance standpoint, limited liabilities do tend to be a bit more expensive to maintain as business entities. Again, you’re going to have an annual service fee in Delaware of $145, annual franchise taxes of $250, and then you’re also going to have to file an annual report in Massachusetts of $500. All told, a limited liability company is a bit more expensive to both form and maintain as a business entity. So it’s something for you to consider when you’re deciding between a corporation or a limited liability company as the form that you choose for your new business entity.
About Scott Bleier
Scott’s practice is focused on the representation of entrepreneurs, emerging technology companies and venture capital investors. Scott specializes in corporate and securities law; private financings; and mergers and acquisitions.
Scott has worked with technology companies and their founders in a wide array of industries, including software, e-commerce and internet, life sciences, biotechnology, retail, consumer products, manufacturing, and healthcare information and management. Scott serves as outside general counsel to his company clients, advising their boards of directors and senior management on a broad range of corporate matters, including company formation, founder equity structures, financing transactions, corporate governance responsibilities, equity-based compensation strategies, employment issues, intellectual property, and commercial transactions. Scott also regularly represents these clients in mergers and acquisitions, including a significant number of sales transactions with large, public companies.
In addition, Scott devotes a significant portion of his practice to the representation of venture capital investors, negotiating and structuring portfolio company investments on behalf of these clients.
Scott also represents established foreign companies seeking to expand their operations to the United States.
Scott speaks regularly on entrepreneurship, start-up companies and financings, delivering presentations to entrepreneurs, investors and lawyers at the Cambridge Innovation Center, Swissnex Boston, the American Bar Association and the MIT Enterprise Forum. Scott currently chairs the Venture Capital Transactional Issues sub-committee of the Business Law Section of the American Bar Association.
Scott is a frequent writer on topics involving start-up companies and corporate law. You can follow Scott on Twitter at @bleierlaw.