1. Why File as an S-Corp in Delaware?
2. How to File as an S-Corp in Delaware
3. Requirements for Delaware Corporations to Be Treated as S Corporations
4. How Delaware S Corporations Are Taxed

A Delaware S Corp enables its shareholders to have limited liability protection just like the shareholders of C corporations. The shareholders of S-Corps are, however, not subjected to double taxation by the IRS. The IRS allows qualified Delaware corporations and some LLCs to be treated as S corporations for tax purposes if they have no more than 100 US citizens or permanent shareholders. Such a business should also have one class of stock or membership. S Corporations in Delaware do not pay state corporate tax.

Why File as an S-Corp in Delaware?

Some high earning businesses with a few shareholders or members stand to gain from being treated as S corporations for tax purposes. They enjoy "pass-through" taxation status, in which the corporations as entities do not pay corporate tax. The businesses owners must still pay income tax on their dividends.

How to File as an S-Corp in Delaware

First, you need to follow the normal filing procedures for a corporation in Delaware. Corporations in Delaware can incorporate using one of the two available forms, depending on whether the business will issue stock or not. Completing either form requires you to fill out the corporation's name, address, and purpose in addition to the incorporator's name and address.

Corporations that will issue stocks complete a form that has a provision for filling out the number of shares the corporation can issue. Corporations that don't intend to issue stock, on the other hand, have to fill out the conditions for membership.

It is a good practice to attach a filing memo to your filing for the Certificate of Incorporation. The memo should list your name and address. This makes it easy for the Delaware Division of Corporations to contact you. The completed documents are sent to Divisions of Corporations. If you desire express service, you can choose expedited processing and pay an extra filing fee. After incorporation, you can change your entity classification to S corporation by filing Form 2553 with the IRS.

Requirements for Delaware Corporations to Be Treated as S Corporations

Any corporation in Delaware that desires to be treated as an S Corporation for tax purposes must meet the following requirements:

  • The corporation should have no more than 100 shareholders.
  • All its shareholders must be US citizens or permanent residents.
  • All the corporation's shareholders must be individuals and not entities. The exceptions to this rule are estates of deceased persons in the process of administration, entities that are tax exempt, and s corporations that are holding all the shares of the S corporation.
  • The sale of stock is restricted.
  • The corporation should have one class of stock but it can have both voting and non-voting shares.
  • If the business that desires S-Corp treatment is an LLC, all its members must have equal rights during distribution and liquidation.
  • The corporation can not be a bank, insurance company, a Domestic International Sales Corporation (DISC), or a former DISC.
  • The corporation should follow a calendar tax year unless it can justify to the IRS why it does not.
  • The decision to file as an S corporation must be supported by all the shareholders. 
  • Delaware laws mandate an S corporation to withhold state income taxes during distribution to non-residents.

How Delaware S Corporations Are Taxed

  • The IRS requires shareholders of S corporations to file individual tax returns under Subchapter K-1 on Form 1040. The IRS will tax the earnings of the owners but does not levy taxes on the profits of the S corporation.
  • Shareholders can use capital losses to offset personal income. This is under the condition that the shareholders do not deduct money exceeding their investment or loans to the corporation. The law also gives S corporation shareholders a measure of freedom to carry these losses forward to a different tax year.
  • The earnings of S corporation shareholders are taxed whether the shareholders take the earnings as dividends or keep them in the corporation.
  • On the state level, an S corporation in Delaware is taxed the same way it would be taxed if it had not filed for S corporation treatment. Delaware does not levy corporate tax on S corporations. S Corporations must still pay Delaware franchise tax and might qualify for other taxes depending on the specific line of business of the S corporation.

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