S Corp is short for S- corporation. S-corporations are pass-through entities, meaning that they are not subjected to federal taxable income. Instead, the owners (known as shareholders) are taxed according to their personal income tax bracket. S-Corps offer investment opportunities, as well as unlimited lifetimes, and limited liability.
What is the Difference Between Delaware S Corporations and C Corporations
There are many differences between S-corporations and, the more common, C-corporations. The first is that S-Corps receive more tax benefits due to being considered a flow-through tax entity. Similar to a sole proprietorship, partnership, or LLC, the profits and losses of an S-corporation will go through the owner’s personal tax returns.
It is good to note that in order to become an S corp, you must first become a C corp. Once this is complete, you may then file subchapter s corp status as long as you meet all of the requirements. These requirements include:
- Having less than 100 shareholders
- All shareholders must bee individuals, not corporations
- You may only have only one class of stock
- All shares must be owned by U.S. citizens or residents
How is a Delaware S-Corp Taxed?
S-Corps are not subject to double taxation, while C-Corps are. This means that an S-Corp is considered a pass-through entity. Pass-through entities are only taxed after they are paid out as salaries or dividends to their shareholders.
This saves S-Corps a lot of money and also means that filing as a C-Corp does not make any sense for a small business. It is important that S-Corps have a good accountant because one mistake in filing can require your company to go back to C-Corp status and suffer dual taxation.
There are a few ways that S-Corps are taxed:
- Payroll taxes: S-corporations are employers automatically. This means that regardless of anything else, you will automatically be an employee of your S-corporation. Because of this, you will need to file monthly payroll deposits, and follow all regulations that pertain to employers.
- Franchise taxes: Some states require a minimum annual franchise tax for all S-corporations. Although Delaware has a corporate income tax, there is no franchise or privilege tax.
- Annual income tax payments: S-corporations differ from C-corporations in that you will not need to make estimated quarterly tax payments. Profits generated by an S-corporation will pass through to you, and you will be required to make payments on your profits.
- Self-employment taxes: Owners of an S-Corporation will only self-employment taxes on the salary they receive from the corporation.
Why Choose a Delaware S Corporation?
Corporations offer many advantages. This includes avoiding double taxation while avoiding liability. S-Corporations are best for businesses that have owners who want to protect their personal assets from the claims of business creditors.
If you are a sole proprietor, then forming as an S-Corporation may not be worth it for you. This is because there are various requirements of an S-Corp, such as having a board of directors, filing annual reports, holding shareholder’s meetings, and operating at a higher level of regulatory compliance. You will also need to file payroll taxes even though you are the only employee. This might simply be a hassle and cost you more than it is worth.
Why would an LLC Elect to be Taxed as an S Corporation?
There are several forms of taxation, and a limited liability company (LLC) is one of them. LLCs are the most flexible when it comes to taxation, as they can elect to be taxed as any form of corporation. Choosing to be taxed as an S-Corp oftentimes provides the best tax savings.
Advantages and Disadvantages of a Delaware S Corp
- Limited liability: All of the company directors, officers, shareholders, and employees will avoid personal asset-liability.
- Pass-through taxation: Owners are able to report their portion of profit and loss. Then, they will only pay taxes on their own tax return, at their individual rate.
- No double taxation: Your income will not be taxed twice as it is done in a C-Corporation.
- Shares of stock: There are often more investment opportunities when it comes to an S-Corporation because the company is able to sell shares of the stock publicly or privately.
- Unlimited lifetime: Even if an owner dies or leaves the company, the business will continue to operate.
- Annual tax filing: Once-a-year tax filing requirement rather than as a C-Corp, which must file quarterly.
- Must be a citizen or resident of the United States: In order to be an owner or shareholder of an S-Corp, you must be a U.S. citizen or permanent resident.
- Limited ownership: There may not be more than 100 shareholders.
- Formation and maintenance: There are many ongoing expenses and formation costs with an S-Corp. Not only will you be required to fill in the Articles of Incorporation, but you will need a registered agent, as well as pay various fees. There are also ongoing fees such as the annual report or franchise tax fees.
- Tax qualification obligations: Any mistakes on your taxes may put you into C-Corp status, requiring double taxation and a tax obligation.
Should You Form an S-Corp?
If you are looking to avoid liability as well as double taxation, then an S-Corp is a great option. Not only will the owners of the company avoid personal liability, but more profits of the company will be kept within the corporation, instead of paid out to the IRS.