LLC vs S-Corp | What Entrepreneurs Need to Know in Delaware

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LLC vs S-Corp in Delaware

When starting a small business in the Delaware, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in Delaware. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in Delaware. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in Delaware

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in Delaware?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in Delaware?

Unlike a limited liability company (LLC) or other business structures, Delaware S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in Delaware

Creating a business in Delaware requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming Delaware Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in Delaware does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Delaware.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Delaware

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in Delaware is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Delaware. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Delaware are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Delaware are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Delaware to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in Delaware with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

Delaware State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Delaware, it costs $0, which can be paid to the FL Department of State. Of course, before forming the whole LLC, you must pay the initial fee of $90 to the Delaware Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Delaware have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

Delaware LLC: An LLC can have any number of owners, called members, from starting Delaware Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

Delaware S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

Delaware LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in Delaware.

Delaware S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

Delaware LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

Delaware S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

Delaware LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the Delaware Operating Agreement.

Delaware S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

Delaware LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in Delaware: LLC or S-Corp?

Filing an LLC or S-Corporation in Delaware requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Registered Agent. To establish an LLC in Delaware, you must submit the Certificate of Formation to the Delaware Division of Corporations. Your Certificate of Formation must include information about your Delaware LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Delaware S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in Delaware: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Delaware depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the Delaware LLC Cost for detailed information.

Delaware S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate Delaware LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in Delaware?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in Delaware. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734​ in Delaware.

FAQs

What is an LLC and an S-corp in Delaware?
A limited liability company (LLC) and an S corporation (S-corp) are different types of business structures in Delaware that offer limited liability protection to their owners.
Which one is better for my business, an LLC or an S-corp?
It depends on your business circumstances and goals, so it’s important to consult with a lawyer or accountant to determine which one is optimal for your particular situation.
How do I form an LLC in Delaware?
To form an LLC in Delaware, you need to file a certificate of formation with the Delaware Division of Corporations and pay the necessary fees.
How do I form an S-corp in Delaware?
To form an S-corp in Delaware, you need to first form a standard corporation or LLC, then meet certain internal revenue service (IRS) requirements to make the S-corp election.
Can anyone form an LLC or S-corp in Delaware?
Yes, any individual or business can form an LLC or S-corp in Delaware.
Which entity offers more tax benefits, an LLC or S-corp in Delaware?
An S-corp in Delaware offers more significant tax benefits than an LLC, as an S-corp files an informational return with the IRS but does not pay income taxes itself since the income passes through to the shareholders.
Can an LLC have only one owner in Delaware?
Yes, an LLC can have only one owner, called a “single-member LLC,” in Delaware.
Can an S-corp have only one shareholder in Delaware?
Yes, an S-corp can have only one shareholder in Delaware, but it cannot have more than 100 shareholders in total.
Are there any residency requirements for owners of an LLC or S-corp in Delaware?
No, there are no residency requirements for owners of an LLC or S-corp in Delaware.
What is the filing fee for an LLC in Delaware?
The fee to file a certificate of formation for an LLC in Delaware is $90.
What is the filing fee for an S-corp in Delaware?
The fee to file a certificate of incorporation for a standard corporation in Delaware is $89, while the fee to convert to an S-corp is $200.
What are the annual maintenance fees for an LLC in Delaware?
The annual franchise tax for an LLC in Delaware is a minimum of $300.
What are the annual maintenance fees for an S-corp in Delaware?
The annual franchise tax for an S-corp in Delaware is a minimum of $175.
Do LLCs and S-corps have to file an annual report in Delaware?
Yes, both LLCs and S-corps in Delaware have to file an annual report with the state.
What is the statute of limitations for lawsuits against LLCs and S-corps in Delaware?
The statute of limitations for lawsuits against LLCs and S-corps in Delaware is three years.
Can LLC owners be held personally liable for business debts in Delaware?
Generally, no, LLC owners cannot be held personally liable for business debts in Delaware. However, there are some exceptions to this.
Can S-corp shareholders be held personally liable for business debts in Delaware?
Generally, no, S-corp shareholders cannot be personally liable for business debts in Delaware.
Can LLCs issue stock in Delaware?
No, LLCs cannot issue stock in Delaware.
Can S-corps issue stock in Delaware?
Yes, S-corps can issue stock in Delaware.
Can LLCs have multiple classes of ownership interests in Delaware?
Yes, LLCs can have multiple classes of ownership interests in Delaware.
Can S-corps have multiple classes of stock in Delaware?
Yes, S-corps can have multiple classes of stock in Delaware.
Are there any limits on how much compensation S-corp owners can be paid in Delaware?
Yes, there are limits on how much compensation S-corp owners can be paid in Delaware, as they must be paid a “reasonable” salary based on what equivalent services would cost from an external provider.
Are LLC businesses considered public or private in Delaware?
LLC businesses are private businesses in Delaware.
Are S-corp businesses considered public or private in Delaware?
S-corp businesses are private businesses in Delaware.
Do owners of LLCs and S-corps in Delaware have to pay self-employment taxes?
LLC owners have to pay self-employment taxes, while S-corp shareholders do not, but they do have to pay Medicare and Social Security taxes on their salaries.
Can LLC and S-corp owners in Delaware obtain employee benefits like health insurance and retirement plans?
Yes, both LLC and S-corp owners in Delaware can obtain employee benefits like health insurance and retirement plans.
Do I need to set up a separate business bank account for my LLC or S-corp in Delaware?
Yes, it is recommended that you set up a separate business bank account for your LLC or S-corp in Delaware.
Can shareholders in an S-corp allocate business losses to their own personal tax returns in Delaware?
Yes, shareholders in an S-corp in Delaware can allocate business losses to their own personal tax returns, subject to certain limitations.
Can an LLC be taxed as an S-corp in Delaware?
Yes, an LLC can elect to be taxed as an S-corp in Delaware.
What is the difference between an LLC and an S-corp in Delaware?
An LLC is a flexible, hybrid entity that offers limited liability protection and potential tax benefits. An S-corp is a more formal type of corporation that offers similar limited liability protection but must adhere to strict rules and regulations.
How do I choose between an LLC and an S-corp in Delaware?
The decision depends on your goals, including liability protection, taxation, and ownership structure. Consult with a Delaware lawyer or accountant to determine which entity best suits your needs.
What are the tax benefits of forming an LLC or S-corp in Delaware?
Both entities can potentially offer tax savings, but each has different tax requirements. LLCs can choose to be taxed as a sole proprietorship, partnership, S-corp, or C-corp. S-corps are pass-through entities that avoid double taxation.
Can I form an LLC or S-corp in Delaware as a single-member or one-person entity?
Yes, both LLCs and S-corps can be formed with one owner.
What is the filing fee for an LLC or S-corp in Delaware?
The filing fee for an LLC in Delaware is $90. The filing fee for an S-corp, or a corporation in general, is $89.
How long does it take to form an LLC or S-corp in Delaware?
It can take as little as one business day to form an LLC, and around five business days to form a corporation.
Can I run my LLC or S-corp from Delaware if I live in another state?
Yes, Delaware does not have residency requirements for business owners.
Do I need a registered agent for my LLC or S-corp in Delaware?
Yes, you must have a registered agent in Delaware for your LLC or S-corp.
Can I be my own registered agent for my Delaware LLC or S-corp?
Yes, but it is often recommended to use a professional registered agent service to ensure compliance with Delaware regulations.
What is the annual franchise tax for an LLC or S-corp in Delaware?
The Delaware annual franchise tax for all LLCs and corporations is a flat fee of $300.
Does Delaware have any additional taxes or fees for LLC or S-corp owners?
No, Delaware does not impose any additional taxes or fees on LLC or S-corp owners.
What are the annual reporting requirements for LLC or S-corp owners in Delaware?
LLCs are required to file a biennial report and pay a $50 fee. S-corps are required to file an annual report and pay a $75 fee.
Is it true that forming an LLC or S-corp in Delaware can improve my credibility with customers and vendors?
Yes, Delaware is known for its advanced business laws and corporate-friendly atmosphere.
Is it necessary to elect officers and hold regular meetings if I form an S-corp in Delaware?
Yes, S-corps are required to have officers, hold annual meetings, and maintain meeting minutes.
Can I have foreign owners in my Delaware LLC or S-corp?
Yes, there are no citizenship or residency requirements for owning a Delaware business.
How do I convert my LLC to an S-corp in Delaware?
You must follow a specific process and obtain the appropriate approvals from both the IRS and the state of Delaware.
Can a non-profit organization be formed as an LLC or S-corp in Delaware?
No, non-profit organizations must be formed as a Delaware non-stock corporation.
What is the Delaware Series LLC and how is it different from a traditional LLC or S-corp?
A Delaware Series LLC is a unique entity that allows for flexible ownership and liability protection at a lower cost than forming multiple LLCs.
Can I form a Delaware LLC or S-corp for real estate investing?
Yes, many real estate investors choose to form a Delaware entity for liability protection and tax benefits.
Do I need to pay Delaware income taxes if I form an LLC or S-corp in Delaware but don’t conduct business in the state?
No, Delaware does not impose corporate income taxes on businesses that do not operate or earn income within the state.
Can I dissolve my LLC or S-corp in Delaware if I move out of state?
Yes, you can dissolve your Delaware entity at any time if you are no longer using it for business purposes.
What are the advantages of a Delaware LLC for startups?
Delaware offers a well-developed legal system and corporate norms that make it easier for startups to work with investors, register intellectual property, and more.
Can I take my LLC or S-corp public if it’s formed in Delaware?
Yes, it’s possible to take a Delaware LLC or S-corp public through a variety of means, including an initial public offering (IPO), direct listing, or reverse merger.
Do I need to file an operating agreement with the state of Delaware for my LLC?
No, Delaware LLCs are not required to file an operating agreement with the state, but it is recommended to create and maintain one.
Is Delaware a good choice for a small business looking to incorporate their company?
Yes, Delaware’s favorable business laws make it a popular choice for small businesses and startups.
Can I change my LLC or S-corp from Delaware to another state?
Yes, it’s possible to change the legal domicile of your entity by undergoing a process known as domestication.
How can I learn more about forming an LLC or S-corp in Delaware?
You can visit the Delaware Division of Corporations website and contact a professional LLC formation service to get started.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Delaware will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in Delaware and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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