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Of all small business expenses, taxes are one of the costliest. Start an S Corporation in Delaware, and you can minimize the amount you pay the IRS. This guide will walk you through creating an S corp for your business entity.
S Corporation in Delaware: Key Points
Delaware LLCs and C corps have the option of choosing S corp status.
S corporations in Delaware must pay $300 annually as a franchise tax.
Delaware doesn’t require that LLCs create an Operating Agreement before electing S corp status. Still, doing so is strongly recommended to help set essential rules and regulations.
Unlock tax savings and ensure compliance with critical regulations with our assistance.
What Is an S Corporation?
An S corporation is a tax designation with the IRS, not a formal business entity. A corporation with S corp status is taxed according to Subchapter S of the IRS code. Eligible Delaware companies that elect to be S corps avoid double taxation and save money on self-employment taxes.
Before starting an S corp in Delaware, you must form a limited liability company (LLC) or a C corporation.
Tax Considerations for an S Corporation in Delaware
An S corporation’s shareholders report their income and losses on their tax returns and pay taxes at individual tax rates. This allows them to avoid double taxation, which refers to paying income tax on corporate and personal tax returns. This practice results in lower self-employment taxes.
S corporation tax treatment works well for small business owners who wish to withdraw money from their companies and take distributions. You can file for S corporation status using IRS Form 2553, Election by a Small Business Corporation.[1]
Delaware Tax Treatment of S Corporations
S corporations in Delaware provide owners with tax savings and personal asset protection. They also reduce their self-employment tax.
Delaware Franchise Tax for S Corporations
S corporations are taxable business entities and must pay Delaware’s franchise tax, an annual payment of $300.
The franchise tax payment is due on or before June 1 each year. There’s a nonpayment penalty of $200, and interest accrues on the tax and penalty at 1.5% per month.[2]
Pass-Through Taxation
Pass-through taxation refers to company shareholders paying most of the business’s taxes on their personal income tax returns. Taxes paid at the individual level tend to be lower than taxes paid at the corporate level.
This “flow-through” taxation method avoids double taxation, paying corporate taxes on revenue and then paying taxes on distributions or sales of stock later.
Requirements for Forming an S Corporation in Delaware
Not all companies are eligible for S corp status. Certain companies, including banks, cannot obtain S corporation status.
It is also important to note that all S corporation shareholders are considered employees. This means the company must pay each shareholder a reasonable salary from an official payroll.
Begin the process by determining the eligibility of your limited liability company. Here are the IRS rules for obtaining and maintaining S corp status.
Be an eligible domestic corporation (Limited liability company (LLC) or corporation)
Have only allowable shareholders (individuals, estates, and certain trusts) that are U.S. citizens or resident aliens
Have no more than 100 shareholders
Have only one class of stock
Obtain shareholder consent and submit the tax status request
Suppose your company obtains S corporation status but fails to follow these rules. In that case, you may forfeit the tax designation. Given the complexities, you should get expert guidance and help. Swyft Filing’s online service can set your company up as an S corp and ensure you completely understand the process.
How to File as an S Corp in Delaware in 6 Steps
You must form an LLC or C corporation before filing for an S corp in Delaware. Here is a step-by-step guide for starting your company and applying.
Step 1: Choose a Business Name
Your first step in forming a company is to choose a memorable and easily searchable business name. Ensure that the name accurately describes your company’s product or services.
You must also abide by these Delaware naming regulations:
The name must contain Limited Liability Company or its abbreviation.
The name may include the name of a member or manager
The name must be distinguishable from other business names in the state
The name may not contain the word bank or any variation
To verify that your chosen business name for your S corporation in Delaware isn’t in use, check via our free business name search tool. Or consult with the State of Delaware’s business entity search.[3]
If you aren’t ready to file your business, secure your chosen name for up to 120 days by completing a name reservation. The fee is $75.[4] It’s also a good idea to reserve your company URL.
You may also want to trademark your business name to protect your brand further. Get nationwide protection by filing for a federal name trademark with the United States Patent and Trademark Office (USPTO).[5] Or apply for a state trademark with the Delaware Division of Corporations.[6]
Step 2: Appoint Directors and a Registered Agent
Delaware law requires that LLCs have a board of directors that consists of 1 or more members, each of whom are citizens. A board of directors will include S corp directors and shareholders. The directors manage the affairs of the company and provide leadership.
All businesses must also appoint a registered agent. Registered agents are individuals or companies authorized to receive official correspondence for your business. You or an employee can serve as your company’s registered agent, but that isn’t always feasible. A Delaware registered agent requires a physical address in the state and must be present at that location from 9 am to 5 pm, Monday through Friday.
When you act as your own registered agent, your address becomes a matter of public record, jeopardizing your privacy. Hiring an outside registered agent service, such as the one provided by Swyft Filings, is the ideal choice. Our registered agent service frees up your time and ensures your privacy.
Step 3: File Articles of Organization (Certificate of Formation)
To make your company official, you must file your company’s Certificate of Formation, also known as Articles of Organization. File the Certificate of Formation with the Delaware Division of Corporations and pay a filing fee of $90.[7]
The Certificate of Formation requires the following information:
The exact name of the limited liability company
The name and address of the registered agent
The signature of an authorized person from the LLC
You won’t need to file an annual report for your LLC to remain in good standing, but you must pay a franchise tax of $300 each year on or before June 1.
Step 4: Create an S Corp Operating Agreement
The State of Delaware doesn’t require an Operating Agreement, but drafting one is highly advised for business owners. An Operating Agreement is a legal document that stipulates rules and regulations regarding the operation of the LLC.
Details outlined in an Operating Agreement include how the company shall be run on a day-to-day basis, including bylaws and the duties of managers and directors. The document also spells out how funds are distributed.
Your company’s S corp Operating Agreement should include these items:
Member names and ownership percentages
Member rights and responsibilities
Member shares of profits and losses
Company management structure
The process required for amendments
Procedures for buying in and selling out
Method for distributing profits among members
Procedures following a member’s departure or death
Voting processes and requirements
How the company will be dissolved
Step 5: Apply for an Employer Identification Number
To form an LLC in Delaware, you must obtain an Employer Identification Number (EIN) from the IRS. This nine-digit number acts as a social security number for your business. The IRS uses this number to track your business and determine income and employment taxes.
Apply for a free EIN on the IRS website.[8] Or, if you prefer to make things even easier on yourself, we can obtain your EIN for you without charge.
Step 6: File Form 2553 for S Corporation Election
The final and most critical step of forming your S corp is to file Form 2553, Election by a Small Business Corporation.[9]. By filling out and submitting this form to the IRS, you request S corp status for your business entity.
Form 2553 for S corporation election requires the following information:
EIN
Date of incorporation
Incorporation state
S corp election date
Tax year selection
Fiscal year selection
Indication if family members are considered one shareholder
Main contact information
Shareholders’ names and addresses
Percentage of stock held by shareholders
Signatures
Form 2553 must be filed within these periods:
Within 75 days of forming your company
Anytime the year before your selected tax year
No more than 75 days following the beginning of the tax year when the S corp status tax designation takes effect
If you fail to file Form 2553 on time, you must also file Form 8832, Entity Classification Election to be classified and taxed as an S corp.[10]
Delaware S Corp vs. Delaware LLC
Like any business structure, an S corporation election has advantages and disadvantages. When it comes to tax purposes, you may find it best to remain a limited liability company.
To help you decide for your Delaware LLC, we’ve summarized the benefits and drawbacks of S corp status tax treatment.
Advantages of Starting an LLC in Delaware
Compared to some corporate structures, LLCs are easy to maintain and set up and offer flexibility in terms of management. This business structure also protects your assets. If you are sued or accrue unmanageable business debt, your assets can’t be used to pay company debt.
LLCs also avoid double taxation thanks to pass-through taxation. Company profits and losses flow through to members’ tax returns, resulting in streamlined tax treatment and lower taxes.
If you want to form an LLC, we simplify the process. You can file online in minutes.
Disadvantages of Starting an LLC in Delaware
Forming an LLC in Delaware does involve costs. You must pay $90 to start your company and $300 in annual franchise tax. You are also required to have a registered agent. If you don’t serve as your own registered agent, there are charges for hiring a company to act on your behalf.
LLC members must also pay self-employment tax. This is necessary because profits pass through to shareholders’ tax returns. They must pay self-employment and personal income tax on the flow-through revenue.
Advantages of Forming an S Corporation in Delaware
S corporations offer a variety of benefits. These include being easy to maintain and offering personal asset protection like LLCs.
The main advantage of S corps is their unique tax treatment. S corporations feature pass-through taxation on company profits. Shareholders only pay self-employment and personal income tax on a reasonable salary rather than the whole amount. Remaining profits are not subject to self-employment taxes and can be withdrawn as tax-free distributions.
Disadvantages of forming an S Corporation in Delaware
S Corporations do have their limits, and not all companies are eligible. S corps are limited to 100 shareholders, which may hamper your expansion plans. Additionally, shareholders can only be U.S. citizens, estates, or certain trusts. This can be limiting if you wish to expand internationally.
Only one class of stock can be offered by s corps. Additionally, given the benefits of S corporations, the IRS tends to watch companies with this tax status more closely. This could mean a greater chance of getting audited.
Get the Legal Benefits of an LLC with the Tax Benefits of an S Corp
While you could incorporate as an LLC and stop there, it’s worth taking a closer look at the tax benefits of forming an S corp. S corporations combine the personal asset protection of LLCs with additional tax advantages. You can use this win-win solution to save a great deal on taxes.
Ready to File for S Corp Status in Delaware?
If you decide to file as an S corporation in Delaware, we can help. As a small business formation services leader, Swyft Filings assists business owners like you with gaining S corp status.
If you’re wondering about the pros and cons of opting for an S corp tax designation, including S corp limitations, our highly trained experts are happy to help. Let us handle the paperwork for you, so you can focus on building your business.
Maximize Tax Benefits: Experience pass-through taxation with Delaware S corp status and avoid double taxation.
Access a One-Stop Solution: Establish an LLC or C corporation easily and then transition to S corp status, all within our platform.
Stay Compliant: Our compliance alerts help keep you up-to-date on all the complex compliance requirements of an S corp so you can stay on the government’s good side.
Frequently Asked Questions
What is an S Corporation in Delaware?
An S corporation is a company that has elected a specific tax status. Eligible companies that elect S corp status avoid double taxation. Company shareholders report flow-through income and losses on their personal income tax returns. This results in taxes being assessed at individual tax rates, often resulting in lower taxes.
Does Delaware recognize S corporations?
Yes, Delaware recognizes S corporations in good standing that follow the rules associated with the tax designation.
What is the turnaround time for filing for S corp status with the IRS?
According to the IRS, a business should know whether their election for S corp status is approved 60 days after filing Form 2553.
What is the difference between an S corp and an LLC?
Both S corps and LLCs feature pass-through taxation. However, S corps offer even more significant tax savings. S corporation shareholders pay personal income and self-employment tax on a reasonable salary. Any remaining profits avoid additional self-employment taxes and can be withdrawn as tax-free distributions.
What are the requirements for an S corporation in Delaware?
To qualify as an S corp in Delaware, your company must meet the following IRS requirements:
Be an eligible domestic LLC or corporation
Have shareholders — individuals, estates, and certain trusts — that are U.S. citizens or resident aliens
Have no more than 100 shareholders
Have only one class of stock
Collect less than 95% of income from exports
Are taxes for LLCs and S corps the same?
While LLCs and S corps are similar, they are not the same. Both pay pass-through taxes on personal tax returns, but S corporations usually enjoy significantly more tax savings. LLC owners must pay personal income and self-employment tax on the entire amount earned.
In contrast, S corporation owners only pay tax on a reasonable salary. After paying those taxes, the remaining profits are distributed tax-free.
What is the S corp tax rate?
The S corporation tax rate is computed based on shareholder personal tax rates, which currently run between 10% to 37%, according to the IRS.[11]
How do I dissolve an S corporation in Delaware?
If you decide to close your doors, file a Certificate of Dissolution with the Delaware Division of Corporations and pay $204.[12]
Bibliography
Internal Revenue Service. “About Form 2553, Election by a Small Business Corporation.” Accessed May 4, 2023.
Delaware Division of Revenue. “Franchise Taxes.” Accessed May 4, 2023.
State of Delaware. “Entity Search.” Accessed May 4, 2023.
Delaware Division of Corporations. “State of Delaware Corporate Name Reservation Application.” Accessed May 4, 2023.
United States Patent and Trademark Office. “Trademark basics.” Accessed May 4, 2023.
Delaware Division of Corporations. “Trademarks and Service Marks.” Accessed May 4, 2023.
Delaware Division of Corporations. “State of Delaware Certificate of Formation of a Limited Liability Company.” Accessed May 4, 2023.
Internal Revenue Service. “Apply for an Employer Identification Number (EIN) Online.” Accessed May 4, 2023.
Internal Revenue Service. “About Form 2553, Election by a Small Business Corporation.” Accessed May 4, 2023.
Internal Revenue Service. “Form 8832.” Accessed May 4, 2023.
Internal Revenue Service. “IRS provides tax inflation adjustments for tax year 2022.” Accessed May 4, 2023.
Delaware Division of Corporations. “State of Delaware Certificate of Dissolution.” Accessed May 4, 2023.
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