Delaware S Corporation Basics:
What Business Owners Should Know

What does S corporation mean?

The term S Corporation refers to business entities that file taxes with the IRS under Subchapter S. In this sense, an S corporation (or S-corp) isn’t a type of business entity in itself, it’s a regular corporation or LLC that elects S-corp status for tax purposes.

S-corp status is intended for small business corporations.

Can an LLC be an S-Corp?

A limited liability company can apply for S-corp status with the IRS. LLCs face the same restrictions as corporations, but as long as your LLC meets all the filing requirements it can elect to file taxes as an S-corp.

Main Advantages of Filing Taxes as an S Corporation

S-corp status allows you to distribute profits as distributions, which has two main advantages:

1. Reduced self-employment taxes
2. No double taxation (for corporations)

1. How can an S-Corp help me save money on self-employment taxes?

Business owners that file taxes as an S-corp can reduce self-employment taxes by separating their income into two revenue streams: salary and distributions. Any income that comes through distributions is not subject to self-employment tax.

2. How can an S corporation help me avoid double taxation?

If you own a corporation, you’ll be taxed as a C corporation by default. The profits of C corporations are taxed twice, first through profits and then through dividends:

• Profits: Corporations are required to pay corporate income taxes on all profits.
• Dividends: When profits are distributed to shareholders as dividends, they’re taxed again.

Filing taxes as an S-corp would allow you to make payments as non-taxable distributions, instead of dividends.

How to Get S-Corp Status

To get S-corp status for your corporation or LLC you’ll have to follow three main steps:

1. Make sure your company complies with federal filing requirements.
2. Get consent from each shareholder (corporations).
3. Submit Form 2553 to the IRS.

You’ll receive a notice from the IRS if/when your application is accepted.

We’ll Take Care of It for You!

IRS forms are notoriously long and unwieldy. We get it if you don’t want to look at them. Ever.

Instead, we can file Form 2553 and get S-corp status on behalf of your business.

Start a Business + S-corp Status

Filing Requirements for Entities Seeking S-Corp Status

Before applying for S-corp status, make sure your company complies with the following IRS regulations for S corporations:

• Be a domestic business entity.
• Have no more than 100 shareholders.
• Include only allowable shareholders. (See: Instructions for Form 2553 – Who May Elect)
• Have only one class of stock.

The following types of corporations are likely ineligible for S-corp status: banks, insurance companies, domestic international sales corporations (DISCs) or former DISCs.

Frequently Asked Questions

S Corporation vs. C Corporation: What’s the Difference?

S-corp and C-corp are both tax statuses. If you form a corporation in Delaware, it will be taxed as a C corporation by default. Businesses taxed as C corporations pay corporate income tax at the entity level. In other words, that means the business itself is subject to corporate income tax on profits.

S corporation, however, is pass-through tax status. This means that income isn’t taxed at the entity-level, but is “passed through” to shareholders, who pay taxes on their individual returns. In this way, businesses taxed as S-corps avoid what is commonly called “double taxation.”

The restrictions on S-corps, such as the limited number of shareholders, generally limits the benefits of this tax status to small corporations.

Can a Delaware LLC file taxes as an S-corp?

A Delaware LLC can file taxes as an S-corp. The name S-corporation can be confusing. But it is important to know that an S-corp is a tax designation, not a business entity type. LLCs and corporations can both file for S-corp designation.

Is it better to have an LLC or an S-corp?

Whether you create a business entity with S-corp status or form a basic LLC depends on the needs of your business. Here are some benefits of both options:

• LLCs have flexible structures and are taxed as partnerships by default, meaning they benefit from pass-through taxation. LLCs can even file for S-corp status, which can help business owners save money when it comes to self-employment taxes.
• S-corp status allows small corporations to avoid double taxation. In this sense, corporations with S-corp status get the prestige that comes with being a corporation, along with the pass-through taxation that LLCs enjoy.

Can I apply for S-corp status during the current tax year?

To get S-corp status for your company during the current tax year, you must submit your application by February 15. Otherwise, your application will apply to the following tax year.