By The Wyoming LLC Attorney Team
Jun 03, 2022Summary
This article outlines the key aspects of Delaware S-Corporations, highlighting their pass-through taxation, tax advantages, and filing requirements. It discusses the differences between S-Corps and C-Corps, tax obligations, and the advantages and disadvantages of choosing S-Corporation status. If considering an S-Corporation, consult a tax professional for guidance.
There are various methods of forming a business in the United States, and an S corporation is one of them. S-corporations are pass-through entities, which means that the corporation is not federally taxed. Instead, each shareholder is taxed on their own income through their personal income tax return.
Although both S-corps and C-corps are both corporations, they are taxed differently. S corporations receive more tax benefits because they are considered a flow-through tax entity.
Similar to a sole proprietorship, partnership, or LLC, Similar to a sole proprietorship, partnership, or
In order to become an S-corp, a corporation must first become a C corp. After this is complete the transition to an S-corp is facilitated by filing a subchapter S-corp status, along with meeting the following requirements:
S-Corps are pass-through entities which means that they are not required to file and pay taxes as a corporation. Instead, this responsibility is passed down to the owners, who pay taxes individually.
Because S-corporations are employers automatically, every owner of an S-corp is considered an employee. This means that monthly payroll deposits must be filed, and all employer regulations must be followed.
Because of your role as an owner, as part of an S-Corporation, you will be required to pay self-employment taxes only on the salary you receive from the corporation.
Unlike a C-corp, as an S-corp you will not be required to make quarterly estimated tax payments. Instead, annual tax payments will be made through the owner’s profits.
Some states require a minimum annual franchise tax when it comes to S-corporations. Delaware’s annual franchise tax is based on how many shares exist:
Failure to pay the franchise tax will result in a $200 penalty, as well as interest charges at 1.5% per month. It will also prevent the corporation from obtaining a certificate of good standing. If you continue to fail to pay franchise taxes it can lead to your corporation being declared void by the State.
One might wonder about the purpose of applying for S corporation status versus the standard C corp status. The main benefit is the ability to provide preferred shares. This means that you can avoid double taxation and avoid liability at the same time. If you are looking to protect your personal assets from business creditor claims, an s corporation is the best solution.
If you are a sole proprietor, then forming an S-Corporation is most likely not worth it. There are a number of requirements and loops to jump through as an S-corp. This includes:
Not only is it a hassle to jump through these hoops, but they can end up creating unnecessary expenses.
When forming an LLC in the state of Delaware you can choose the method in which you prefer to be taxed. There are several forms of taxation available, and while the LLC is the most flexible in being able to choose any tax election, some LLCs choose to be taxed as an S-corp. This is because an S-Corp election can provide some of the best tax savings along with liability protection.
One of the main advantages of forming an S-corporation is that there is always a high level of personal liability protection for its owners. With similar tax benefits to flow-through tax entities, an S-corp provides overall flexibility.
If you're prepared to establish your Delaware corporation today and seek further details, please fill out our contact form or dial +1 (307) 683-0983 to connect with one of our knowledgeable paralegals.