Get the worry-free services and expert support you need to form an S corp in Delaware today.
Are you considering starting a new business or setting up an existing business as an S corp in Delaware? “S corp” (S corporation) refers to a tax status a corporation or limited liability company (LLC) can apply for with the potential to lower their taxes. Read on to learn how to form a Delaware S corp.
For some LLC owners, forming an S corp can lower what they would pay in self-employment taxes. For C corporations (the default form of corporation), it can be a way to avoid double taxation. Our “What Is an S Corporation?” page explains more about the pros and cons of S corp tax status.
If you’re thinking of setting up an S corp, Delaware may be the place to do it. The First State has a long-established reputation for being friendly to businesses, especially Delaware corporations.
First, know that an S corporation is not a business structure or separate legal entity. It’s a tax classification that either an LLC or a corporation can apply for with the Internal Revenue Service (IRS), provided it meets the requirements. We’ll outline those criteria and the steps you would need to take to file as an S corporation if you decide that it’s right for your business.
Before you decide on an S corporation in Delaware, you need to be aware of the S corporation filing requirements. Not every LLC or corporation will qualify. To get S corp tax status from the IRS, your business must:
If your business fits these requirements, keep reading to learn about forming an S corporation in Delaware.
To set up a Delaware S corp, you’ll first need to create either an LLC or a C corporation if you haven’t already done so. Then, you’ll file an election form with the IRS.
If you’re ready to learn about filing as an S corporation in Delaware, we’ll walk you through it step by step. First, we’ll show you how to form an LLC in Delaware. If you’d prefer to form a Delaware corporation instead, follow the instructions on our Delaware corporation page. Then, in Step 6, we’ll explain how to file for S corp tax status as either an LLC or corporation.
First, select a name for your Delaware LLC. It’s important to find the right LLC to reflect what you’re selling and your overall brand, but you must also follow Delaware’s business naming guidelines.
Your name must be unique within the state of Delaware. You can perform a Delaware business entity search to see if the name you want is in use by another business in Delaware.
You’ll also have to comply with all naming regulations for a Delaware LLC. For example, your company’s name must end with the proper designator. Your choices are “limited liability company,” “LLC,” or “L.L.C.”
As you name your LLC/future S corporation, Delaware naming conventions need to be in the forefront of your mind:
Once you find a name you like and confirm that it’s available, we can help you reserve your business name. That way, you can prevent others from taking it while you finish the business formation process.
Next, designate a registered agent for your LLC. A Delaware registered agent’s primary purpose is to receive legal documents (such as notices of lawsuits) on behalf of your business.
The registered agent must be available during normal business hours to accept certain notices like subpoenas in person and relay them to the business owners. The registered agent must:
Unlike most states, Delaware allows the LLC itself to be its own registered agent.
Some LLC owners use a registered agent service instead of being their own agent. This frees them from the responsibility of constantly having to be available to receive legal notices in person and the potential embarrassing scenario of being served with notice of a lawsuit in front of clients. Our registered agent service can provide you with an agent.
Complete and file your Certificate of Formation. Once approved, this document (sometimes referred to as the Articles of Organization in other states) makes your LLC in Delaware official.
You can file your Certificate of Formation online with the Delaware Division of Corporations. Alternatively, you can fax or mail your paperwork. The filing fee is $90 at the time of this writing.
Remember that we can handle this paperwork for you with our business formation services.
Creating an LLC operating agreement is the next step. Even though having an operating agreement in Delaware isn’t required by state law, it’s a critical document for an LLC. An LLC operating agreement usually covers the rules your company will follow, lists LLC members, each member’s ownership percentage, how profits are divided, and more.
The operating agreement also discusses how finances will be handled and how decisions will be made (including management and member voting structure). It’s essentially the agreed-upon rules for your LLC for you and the other members. It becomes legally binding once signed by all the members.
Obtain an Employer ID Number (EIN) from the IRS. Many LLCs, including those with employees or more than one owner, are legally required to obtain an EIN, also known as a Federal Tax Identification Number. Most banks require an LLC to have an EIN to open a business bank account. This nine-digit number is used for tax purposes and other financial paperwork.
We can get this number for you with our EIN service.
On the state level, if you generate sales in Delaware, have employees working in Delaware, or have property or a business location in Delaware, you’ll need to register your business with the Division of Revenue by applying for a Delaware business license.
Submit the form to apply for S corporation status. Once your LLC or corporation formation is approved by the state, you’ll need to file Form 2553, Election by a Small Business Corporation, to get S corporation status.
The IRS requires you to complete and file your Form 2553:
One additional note for LLCs wishing to file as an S corporation: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail.
For more information on when and how to file Form 2553, visit the IRS website.
While S corporation classification does come with benefits for some businesses, making this election might not be right for everyone. Be sure to carefully weigh the various pros and cons before deciding how you want to proceed. Consult a tax professional about whether the S corp election would be best for your company.
The benefits of filing as an S corporation for an LLC differ from the benefits for a C corporation. Let’s look at the advantages for LLCs first.
A traditional LLC already has pass-through taxation, so the benefits of S corp election for an LLC have to do with self-employment taxes. This takes some explanation, but for certain LLCs, it could save a lot in taxes.
The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they aren’t allowed to be employed by the LLC. Being self-employed means paying self-employment taxes (the taxes that go toward Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay part of them.
But electing S corporation status allows the members to be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive.
Depending on factors such as how profitable your company is, the savings could add up to a lot. (To be clear, the members will still pay income and all other applicable taxes on their share of the profits.)
One caveat to this arrangement is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $2 and contribute almost nothing to Social Security and Medicare.
So, what’s considered “reasonable compensation”? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” Essentially, the IRS considers “reasonable” to be something similar to what others in your field are earning for the same job.
If the IRS decides that your salary isn’t reasonable, it has the authority to reclassify your non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases have supported the IRS’s right to do this.
Owning an LLC with S corporation status can also have some drawbacks over a traditional LLC:
As we listed above, S corps must adhere to more regulations than a standard LLC or corporation. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.
Due to the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS tends to scrutinize LLCs with S corporation tax status more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. In fact, LLCs with S corporation status may want to observe many of the same formalities that corporations do (such as regular meetings and extensive record keeping), even if they’re not legally required to.
Having an LLC that files as an S corporation usually means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to do so. Your taxes will be more complicated, too.
With these added complications, you’re likely to have higher administrative costs. You may find that you need an accountant, bookkeeper, and/or a payroll service or software.
If you have a C corporation (the default form of corporation), filing as an S corp has the following benefits:
A major disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. But when those profits are distributed to the individual owners (shareholders) as dividends, they’re taxed a second time because the shareholders pay personal income tax on their share of the profits. In other words, the profits are taxed twice.
But when a corporation qualifies to be an S corp, the corporate income tax is bypassed; profits are taxed only at the individual level. The corporation itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how business entities like sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they opt to be taxed as a corporation.
We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of double taxation aren’t as severe now as they were.
Just as business profits pass through to the owners of an S corp, so do the losses. Unlike C corporation shareholders, S corp owners can write off the company’s losses on their personal income statements.
This can help offset their income from other sources and can be helpful if the corporation loses money in the initial years. Still, make sure you’re aware of the IRS’s shareholder loss limitations.
Under the Tax Cuts and Jobs Act of 2017, some S corp owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.
Qualified business income (QBI) is essentially your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a more detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).
S corporation status also has its pitfalls for Delaware corporations:
As mentioned above, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could become an issue later if the corporation expands and goes public.
All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit the corporation’s ability to expand internationally. Also, the corporation can’t have partnerships or corporations as shareholders. C corporations don’t have these limitations.
Corporations sometimes use preferred stock to attract investors, but the IRS doesn’t allow this for S corps.
Because of the restrictions S corps have, the IRS watches them more closely to see if they’re in compliance. In other words, your corporation is more likely to get audited.
We want to stress again how important it is to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, and they also may be able to help you find additional tax savings.
When an LLC or C corp elects to be taxed as an S corp for federal income taxes, Delaware, like most states, applies state income tax in the same way. That is, the business itself doesn’t pay federal or state income tax on the profits. The profits are usually taxed only on the personal income tax return of the individual owner or owners.
Even so, Delaware does require every S corp that derives income from within the state to file Form 1100S, S Corporation Reconciliation and Shareholders Information Return.
Forming a business can be complicated, but we’re here to make it as easy for you as possible.
If you want to form an LLC with S corp status, our S corp service can help you do just that. Plus, we offer other services to help you run and grow your business and stay in compliance with state and federal laws.
Disclaimer: The content on this page is for information purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
For a corporation, the biggest tax advantages are being able to avoid double taxation. Typically, a C corporation’s profits are taxed at both the business and individual shareholder level, while an S corp’s profits are taxed only on the individual level when the shareholders pay personal income tax on their dividends.
For an LLC, when the members elect S corporation status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay employment taxes (Social Security and Medicare) on their salary and not the profits they receive. For some LLCs, this can add up to substantial tax savings.
The naming process for your LLC or corporation isn’t affected by your S corporation status. Before formally registering a business name, search the Delaware business entity records to make sure that you don’t select one that’s already in use by another business. That aside, however, you can typically name your Delaware company nearly anything you want as long as you comply with any applicable state naming regulations.
S corp status may not be right for all businesses. If you’re not sure whether to identify your LLC as an S corp or keep the default status, be sure to consult with an experienced business law attorney or accountant in Delaware.
Calculating taxes can be challenging, but you can check out our S corp tax guide to learn more about navigating taxes for your Delaware S corp. A certified tax professional can give you more definitive information for your circumstances.
No, our S corp service is only for applying for S corp status when you form your LLC with us.
According to the IRS website, you’ll be notified of whether or not your S corp election is accepted within 60 days of filing Form 2553.
If you’re a new LLC, you must apply for S corp status within 75 days of the formation or no more than 75 days after the beginning of the tax year in which the election is to take effect. For an existing business, you would file at any time during the tax year preceding the tax year it is to take effect.
An LLC is a legal business entity, but an S corp is a tax filing status. You can read more on our LLC vs. S Corp page.
Yes, provided it meets the IRS’s requirements for becoming an S corporation.
When an LLC or C corp elects to be taxed as an S corporation for federal income taxes, Delaware, like most states, applies state income tax in the same way. That is, the business itself doesn’t pay federal or state income tax on the profits. The profits are usually taxed only on the personal income tax return of the individual owner or owners. However, Delaware does require every S corporation that derives income from within the state to file Form 1100S, S Corporation Reconciliation and Shareholders Information Return.
Delaware Business Resources
How to File an S Corp in Your State