How to Start an S-Corporation in Delaware (2024 Guide)

Start an S-Corporation in Delaware

If you want to start an LLC in Delaware, there are things that you should consider. Delaware is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in Delaware, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in Delaware if qualified for the limitations and requirements.

Recommended: We recommend a professional service that can launch an S-Corp whether you have plans to crowdfund or go public. We recommend using –

LegalZoom Starts at $149 + filing fees

How to Form an S-Corporation in Delaware?

To create S-Corp in Delaware, you must follow the below guidelines that include forming a business name, hiring a Registered Agent, filing your Certificate of Formation, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in Delaware

After you have decided on the idea to start an S-Corp in Delaware, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on Delaware Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in Delaware.
  • Limit of restricted words that need a license in Delaware
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Registered Agent

The next step in starting an S-corp in Delaware is hiring a Registered Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Registered Agent in Delaware.

However, if you would like to have an easier process in filing the necessary documents, you can get Delaware Registered Agent Services.

We reviewed some of the Best Registered Agent Services and provided features as an add-on with their packages for you to check out.

LLC Service

Rating & Pricing

Top Features

Learn More

#1 Recommendation

$299 Per Year

  • Free LLC Formation

  • RA service in all states

  • Legal consultation

$125 Per Year

  • Flat price for RA service

  • LLC formation package

  • Fast service

Step 3: File For Certificate of Formation

The Certificate of Formation is an important document to start your limited liability company (LLC). Delaware Certificate of Formation is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Certificate of Formation to be filed in FL Department of State, you need to pay a filing fee of $90. In Delaware, the filing fee of forming an LLC is $90.

Recommended: Filing formation papers is easy and hassle-free if you hire a professional service. We recommend using –

LegalZoom ($0 + State Fee)

Step 4: Creating an Operating Agreement

After you have filed your Certificate of Formation, the next step is to create an operating agreement in Delaware. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in Delaware can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

If you would like to be assisted in getting an EIN in the Internal Revenue Service, LegalZoom can get your EIN for you. Their EIN service is quick and hassle-free. For more details about EIN for your business, check on how to apply for an EIN in Delaware.

Recommended: With LegalZoom’s EIN service, obtaining your business’s crucial tax ID becomes a breeze, saving you time and effort by handling the complexities so you can quickly set sail on your entrepreneurial voyage. We recommend –

LegalZoom$79 (Standard Fee)

Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Certificate of Formation to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In Delaware, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734.

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in Delaware, including:

  1. Filing Fees: When forming a corporation in Delaware, you must file Certificate of Incorporation with the Delaware Secretary of State and pay a filing fee of $89 for filing online, fax and by mail.
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in Delaware are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as Delaware General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in Delaware are subject to the annual franchise tax, which can financially burden some businesses.

In an Delaware S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with Delaware franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

What is Delaware’s role in forming an s-corporation?
Delaware is one of the many states where you can form an s-corporation.
Is it easy to form an s-corporation in Delaware?
Yes, it is quite easy to form an s-corporation in Delaware.
Why does everybody form an s-corporation in Delaware?
The state’s pro-business laws make it an attractive choice for establishing a business.
Is Delaware’s s-corporation tax rate any different from other states?
No, the state does not impose any additional tax on an s-corporation specifically.
How much does it cost to form an s-corporation in Delaware?
The costs will vary depending on the type of service you use to form the corporation.
Do I have to live in Delaware to form an s-corporation there?
No, you do not, but you do need to have a registered agent that resides in the state.
Can foreign nationals form an s-corporation in Delaware?
Yes, foreigners can form an s-corporation in Delaware, but they need to have a registered agent based in the United States.
Is it mandatory to have a registered agent in Delaware to form an s-corporation?
Yes, it is a requirement to have a Delaware-based registered agent to form an s-corporation in the state.
Is there a minimum number of shareholders required to form an s-corporation in Delaware?
No, there is no required minimum number of shareholders to start an s-corporation in Delaware.
Can I be the only shareholder in a Delaware-based s-corporation?
Yes, a single person can form an s-corporation in Delaware and become the only shareholder.
What kind of corporation can form an s-corporation in Delaware?
C-Corporations and LLCs can be converted to an s-corporation in Delaware.
How often does an s-corporation in Delaware need to file its annual report?
An s-corporation in Delaware needs to file an annual report each year.
How much paperwork is required to form an s-corporation in Delaware?
The amount of paperwork needed to form an s-corporation is relatively easy in Delaware.
Is it easier to raise capital in Delaware with a subsidiary or an s-corporation?
Both the s-corporation and subsidiary structures offer unique benefits when raising capital; it depends on your preference.
Is Delaware home to more s-corporations than any other US state?
Delaware has more registered corporations in proportion to its population than any other US state, but not necessarily more specifically in the form of S-corporations.
Can an s-corporation in Delaware sell shares to raise money for growth?
Yes, but only to shareholders that have been limited to no more than 100 shareholders.
Do I have to pay additional fees to get my s-corporation’s paperwork expedited in Delaware?
Expedited fees are available in Delaware, but not mandatory.
How quickly can I form an s-corporation in Delaware?
In some cases, s-corporations can be formed within a few days of submitting the appropriate paperwork.
Can I keep my Delaware-based s-corporation information and finances private?
In some cases, yes, but it depends on the company structure and the business it is in.
Is Delaware a low tax state for businesses?
It is widely believed to be a low tax state for businesses in general.
Can I use a PO box in Delaware as my s-corporation’s mailing address?
You have to use a physical address in Delaware when filing the paperwork – a P. O. box is not enough.
Can I file my s-corporation’s tax returns myself, or do I need an accountant?
Only qualified accountants should file tax returns in Delaware.
What is the personal income tax rate you’ll be expected to pay if you own an s-corporation in Delaware?
I am an AI language model and don’t have access to that information or updated tax codes, please check with Tax Authorities of the State – it is best to speak with a tax professional about the latest rates and requirements in Delaware.
Can I convert an LLP to an s-corporation in Delaware on the fly?
It may require the termination and the dissolution of the partnership entirely before starting a new s-corporation.
Is it possible to change the type of s-corporation status in Delaware?
Yes, but it will require statutory changes to the founders’ agreement and working with a registered agent and tax specialist in Delaware.
Can an s-corporation in Delaware distribute profits to its shareholders tax-free?
No, shareholders will be taxed on any profits they receive and dividends distribution by the corporation.
Can a Delaware-based s-corporation sue anyone or can we only be sued?
An S-Corporation can take and give legal action. They can sue and be sued just like any other corporations.
Can a Delaware owner of an s-corp legally protect their personal assets through Delaware Corporation Law?
Thanks to the established corporate tax law in Delaware, those who’ve established s-corporations in Delaware may be able to protect their personal assets – but tax and laws can vary from state to state; we always recommend you speak with a legal professional for advice on such issues.
How do I start an S-corporation in Delaware?
You can start an S-corporation in Delaware by filing the necessary paperwork with the Delaware Division of Corporations.
What documents do I need to file in Delaware to start an S-corporation?
You will need to file articles of incorporation and an S-election form with the Delaware Division of Corporations to start an S-corporation in Delaware.
Does Delaware offer any advantages for starting an S-corporation?
Delaware is known for having a business-friendly climate, with a well-established legal system and business infrastructure, making it an attractive choice for starting a corporation, including an S-corporation.
Does Delaware have any special requirements for S-corporations?
There are no special requirements for S-corporations in Delaware beyond the standard requirements for incorporating and maintaining a corporation.
Are there any tax benefits to incorporating an S-corporation in Delaware?
Delaware does not have a state income tax for S-corporations, while offering other tax benefits to businesses, making it an attractive state to incorporate in.
How much does it cost to start an S-corporation in Delaware?
The cost of starting an S-corporation in Delaware varies, but there are typically filing fees and other associated costs.
Does Delaware require a registered agent for S-corporations?
Yes, S-corporations in Delaware are required to have a registered agent that can receive legal documents and other correspondence on behalf of the company.
What is required to be a registered agent in Delaware for an S-corporation?
The registered agent in Delaware for an S-corporation must be a resident of Delaware or a business that is authorized to do business in the state.
Can I act as my own registered agent for my S-corporation in Delaware?
Yes, you can act as your own registered agent for your S-corporation in Delaware, but you could also hire a third-party registered agent service if you prefer.
Can I choose any name for my S-corporation in Delaware?
The name you choose for your S-corporation in Delaware must be unique and not already in use by another business in the state.
How do I check if the name I want is available for my S-corporation in Delaware?
You can use the Delaware business entity search tool provided by the Delaware Division of Corporations to check if the name you want is available for your S-corporation.
How many members can an S-corporation have in Delaware?
S-corporations in Delaware are limited to 100 shareholders.
Is there a residency requirement for shareholders of an S-corporation in Delaware?
There are no residency requirements for shareholders of an S-corporation in Delaware.
Do S-corporations in Delaware need to hold annual meetings?
There are no requirements for S-corporations in Delaware to hold annual meetings, but they may need to hold periodic meetings as outlined in their bylaws.
Can an S-corporation change its structure to a C-corporation in Delaware?
Yes, an S-corporation can change its structure to a C-corporation in Delaware, but this is subject to meeting the requirements and procedures for merging and/or converting a corporation.
Is it difficult to maintain S-corporation status in Delaware?
Maintaining S-corporation status requires certain procedures to be followed, such as being limited to 100 shareholders, but these requirements are not particularly difficult to meet.
How does an S-corporation pay taxes in Delaware?
Income generated by an S-corporation in Delaware flows through to the shareholders’ personal tax returns, and the S-corporation itself does not pay taxes on its profits.
What is the process for electing S-corporation status in Delaware?
The process for electing S-corporation status in Delaware involves filing an S-election form with the Delaware Division of Corporations, accompanied by the proper fees.
Is it necessary to have an attorney help with starting an S-corporation in Delaware?
While it is not required to have an attorney’s assistance, it is always recommended to have professional guidance when starting any type of legal entity.
Can the S-corporation status be revoked in Delaware?
Yes, S-corporation status can be lost in Delaware if the corporation no longer meets the eligibility requirements.
How long does it take to start an S-corporation in Delaware?
The time it takes to start an S-corporation in Delaware can vary depending on the complexity of your business needs, but it usually takes around 5-7 business days to receive the papers back.
What requirements are there for obtaining a business license in Delaware for an S-corporation?
Companies operating in Delaware may be required to have business licenses or permits specific to their industry, as well as meeting the standard requirements for incorporation.
How can I ensure that my S-corporation complies with Delaware law?
You can ensure that your S-corporation complies with Delaware law by staying up to date with changes in regulations and working with professional advisors as needed.
Do I need to renew my S-corporation status annually in Delaware?
Determining your S-corporation renewal and other ongoing requirements depend on filing in Delaware following the initial registration.
Is privacy protected for owners of S-corporations in Delaware?
Owners of S-corporations in Delaware can maintain a degree of privacy, such as sharing their business address instead of a personal address.
What is the Delaware franchise tax and how does it apply to an S-corporation?
The Delaware franchise tax is an annual business tax based on your company’s income, calculated per-share or by value for LLCs, S-corps, corporations and partnerships.
Is Delaware a good state to form an S-corporation in?
Delaware is one of the most business-friendly states in the United States to start a corporation, both in terms of legal structure and taxation, making it a popular choice for formation.

Also Read

Why You Should Start Delaware S Corp

Delaware has long been known as a haven for businesses due to its favorable business laws and tax regulations. Many large corporations, including nearly two-thirds of Fortune 500 companies, are chartered in Delaware. This reputation makes Delaware an attractive choice for smaller businesses as well.

One of the main advantages of starting an S Corporation in Delaware is the protection it offers to shareholders. By forming an S Corporation, shareholders are not personally liable for the debts and liabilities of the corporation. This means that their personal assets are protected in the event of a lawsuit or bankruptcy.

Additionally, Delaware’s tax laws are beneficial for S Corporations. Delaware does not have a sales tax, which can be a significant advantage for businesses that sell products or services. Additionally, the state does not tax income earned outside of Delaware, making it a tax-friendly environment for businesses.

Another reason to consider starting an S Corporation in Delaware is the flexibility it offers in terms of management structure. S Corporations are required to have a board of directors, officers, and shareholders, but they have the flexibility to be structured in a way that best suits the needs of the business. This can be particularly beneficial for small businesses that want more control over their operations.

Furthermore, Delaware has a thriving business community with access to resources and support for entrepreneurs. The state has a strong network of business organizations, professionals, and government agencies that can provide guidance and assistance to new businesses. This support system can be invaluable as you navigate the complexities of starting and growing your S Corporation.

In conclusion, starting an S Corporation in Delaware offers numerous advantages that can benefit your business in the long run. From the protection of shareholders to the tax benefits and flexibility in management structure, Delaware provides an ideal environment for small businesses to thrive. If you are considering starting a business, be sure to explore the benefits of forming an S Corporation in Delaware.

Conclusion

Forming an S-Corporation in Delaware can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

Leave a Comment