LLC vs S-Corp in Delaware


Steve Bennett
Steve Bennett
Business Formation Expert
Steve runs LLCBuddy, helping entrepreneurs set up their LLCs easily. He offers clear guides, articles, and FAQs to simplify the process. His team keeps everything accurate and current, focusing on state rules, registered agents, and compliance. Steve’s passion for helping businesses grow makes LLCBuddy a go-to resource for starting and managing an LLC.

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LLC vs. S Corp in Delaware

Making choices as an entrepreneur is a big challenge, especially when choosing what business structure to form in Delaware. When it comes to a business structure, you can choose whether to have a C-corporation, S-corporation, Sole Proprietorship or an LLC in Delaware. Before you start Delaware LLC filing, you must compare which structure suits you. You might be considering two popular options: a Limited Liability Company (LLC) or an S Corporation (S-Corp). Both of these structures offer distinct advantages and protections, but selecting the right one depends on various factors, including your business goals, tax preferences, and management style.

If you are confused with Delaware LLC vs. S-Corporation, and thinking which one is better and more suitable for the business that you will form, there are a few things that you should consider. Before we get through this article, you should understand what an LLC and S-Corporation mean in Delaware.

LLC vs. S-Corp: Definition

While forming an LLC, you must follow some major steps. It is a business structure that protects your personal assets from getting affected by business liabilities. On the other hand, the S Corp is not a conventional business structure, but it is tax status that your can file with the IRS. S Corp does not provide personal asset protection like an LLC. Here are the detailed definitions of the two-

What is an LLC in Delaware?

A limited liability company (LLC) is a formal business structure that provides personal asset protection. Under this structure, the LLC owner/member can save his/her personal assets in case the business is in debt or is being targeted with a lawsuit. In some special cases, if your company is legally sued, the other party can go after your personal assets. This is called piercing the corporate veil, where you become personally liable for the company’s debt.

Forming an LLC in Delaware gives you a pass-through tax benefit where you don’t have to pay an income tax based on your business revenue; instead, the income tax will be calculated based on your personal income.

What is an S-Corp in Delaware?

An S-Corporation (S-corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other business structures. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-Corporation is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

S-corp is a prominent alternative to the LLC. Unlike a conventional C-corp, S-corp is more suitable for small and medium businesses, such as businesses with 100 shareholders.

LLC Vs. S-Corporation: Which is More Preferable in Delaware?

In Delaware, forming a business is crucial since you need to be adequate in your decision, especially when you think if Delaware LLC or an S-Corporation in Delaware is preferable. An S-Corporation is a tax classification that some small businesses are qualified for, whereas an LLC is a legitimate company form. By submitting a document to the Internal Revenue Sector (IRS), corporations and LLCs can choose S-Corporation taxation. An S-Corporation can be less formal than forming an LLC and doesn’t normally provide the same protection. Also, unlike LLC, S-Corporation in Delaware doesn’t provide the same protections entrepreneurs seek from an LLC. It’s important to consider your options when launching a business from a legal and tax point of view.

It is better to consult a legal professional before you set up an LLC or S-corp. We shared basic differences and how you can form an LLC and S-corp. But it is always recommended to consult a professional before making any decision.

– LLCBuddy Editorial Team

Tax Difference Between Delaware LLC and S-Corp in Delaware

There is a difference between LLC and S-Corporation when it comes to paying taxes. Based on Federal and State Tax differences between the two, you can determine if S-Corporation or LLC in Delaware is suitable for your business.

Federal Taxes: There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Delaware. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

Pass-Through Taxes: LLC and S-Corporation in Delaware are the same in terms of pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners are required to pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Delaware are mandated to have double taxation. It means that they must pay federal taxes at the entity level.

Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Delaware to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes.

Consider the scenario where you are the only owner of an LLC in Delaware with a $150,000 annual profit. And let’s say that $100,000 is a fair wage in your location for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $150,000 profit. But, if your company is taxed as a Delaware S-Corp, you will only be responsible for paying payroll taxes on the standard wage of $100,000. Income tax will still apply to the remaining $50,000.

Delaware State Taxes: At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Delaware, it costs $0 because it is not mandatory that can be paid to the FL Department of State. Of course, before forming the whole LLC, you must pay the initial fee of $90.

On the other hand, you also need to pay taxes if you form an S-Corporation in Delaware; besides, you must pay the S-Corp filing fee and an annual report fee after a year of establishing your S-Corp. You must also go to the FL Department of State to pay this.

How do Delaware LLCs and S-Corporations Handle Liability Protection?

In Delaware, you have no personal responsibility for the financial and legal liabilities of an LLC you will form. An S-Corporation does not provide liability protection because it is a tax designation rather than a distinct business entity. Whatever liability defense an S-Corporation provides is provided by the underlying business entity that chose the tax status. You will have the liability protection the LLC offers if it chooses S-Corporation status for tax purposes.

LLC Vs. S Corporation Ownership Requirements Comparison

Strict ownership requirements exist for LLCs and S-Corporations in Delaware. LLC ownership regulations are strict because a new member can only be accepted with the approval of all existing members. On the other hand, S-Corporation ownership regulations are also strict because only specific people are permitted to become shareholders. Also, an S-Corporation can’t have more than 100 shareholders and needs one class of stock.

The following are the reasons why some cannot be shareholders in the S-Corporation in Delaware.

  • Insurance business
  • Domestic and International sales corporations
  • Partnerships
  • Corporations
  • Unauthorized Immigrants
  • Certain financial institutions

Although you know most of the reasons regarding the ownership requirements of both LLC and S-Corporation, you should still seek legal advice in preparation for your business and it is best to visit LLCBuddy for your Delaware LLC or Delaware S-Corp.

Which is Easier to File in Delaware: LLCs or S-Corporations?

Filing an LLC or S-Corporation in Delaware takes time and preparation. Even though it is not as easy as it seems, something manageable still makes it not difficult. LLC and S-Corporation can be filed by Delaware Registered Agent. However, in order to establish an LLC in Delaware, you must submit a Certificate of Formation to the Delaware Division of Corporations. Your Certificate of Formation must contain information for your LLC, along with payment of the associated filing fee.

In addition, you need to submit more papers to make the Delaware S-Corporation election. File a Form 8832 to inform the Internal Revenue Sector (IRS) that you prefer to tax your LLC as a corporation rather than a partnership. Then you will then submit Form 2553 to choose S-Corporation status.

Do not forget that you must submit annual tax returns and reports after creating your LLC in order to maintain legal compliance.

Important Information

Who Pays More Taxes, an LLC or S-Corporation?

Taxes differ for LLC and S-Corporation in Delaware because it depends on the tax purposes and how much profit will be generated. Usually, LLCs are frequently taxed at personal rates and LLC owners can elect to be treated as a separate company with its own federal tax identification number.

On the other hand, owners of S-Corporations must receive a salary that includes Social Security and Medicare taxes. The owner, however, can get dividend income or some of the leftover profits, but not as an employee; thus, they won’t be subject to Social Security and Medicare taxes on that money.

Should I Convert an LLC to S-Corporation?

Since your business assets are separated from your personal assets if you’re a sole proprietor, it may be advisable to form an LLC. You are not restricted to modifying the structure of your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and adhere to more regulations, it would be ideal for more companies with more shareholders.

How to Structure an LLC to S-Corporation?

To structure an LLC to S-Corporation in Delaware, you must submit Form 2553, Election by a Small Business Corporation, to the IRS in order to choose S-corp taxation. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or not more than 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, in order to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS. In Delaware, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734.

FAQs

What are the advantages of forming an LLC in Delaware?
Delaware is a popular state for forming LLCs due to its streamlined registration process, flexible governing laws, and strong asset protection.
What are the advantages of forming an S-Corp in Delaware?
Forming an S-Corp in Delaware gives business owners the ability to take advantage of the state’s streamlined registration process, flexible governing laws, and strong asset protection. Additionally, S-Corps may be eligible for federal tax benefits.
What are the differences between an LLC and an S-Corp in Delaware?
The primary difference between an LLC and an S-Corp in Delaware is that an S-Corp is a formal business structure that is subject to federal tax law, whereas an LLC is a less formal structure that is primarily subject to state law.
What are the filing requirements for an LLC in Delaware?
To form an LLC in Delaware, business owners must file a Certificate of Formation with the state and pay the applicable fees. The Certificate of Formation must include the LLC’s name, purpose, and registered agent information.
What are the filing requirements for an S-Corp in Delaware?
To form an S-Corp in Delaware, business owners must file a Certificate of Incorporation with the state and pay the applicable fees. The Certificate of Incorporation must include the S-Corp’s name, purpose, and registered agent information. Additionally, the S-Corp must file an S-Corp election with the IRS.
Is there a minimum capital requirement for LLCs or S-Corps in Delaware?
No, there is no minimum capital requirement for LLCs or S-Corps in Delaware.
What taxes must LLCs and S-Corps in Delaware pay?
LLCs and S-Corps in Delaware must pay state business taxes and any applicable federal taxes.
Does Delaware offer tax incentives for LLCs or S-Corps?
Delaware does not offer specific tax incentives for LLCs or S-Corps. However, S-Corps may be eligible for certain federal tax benefits.
What is the annual reporting requirement for LLCs and S-Corps in Delaware?
LLCs and S-Corps in Delaware are required to file an Annual Franchise Tax Report with the Delaware Secretary of State each year.
Are LLCs or S-Corps in Delaware required to hold annual meetings?
LLCs and S-Corps in Delaware are not required to hold annual meetings. However, S-Corps must hold a meeting of shareholders each year.
What are the ongoing compliance requirements for LLCs and S-Corps in Delaware?
LLCs and S-Corps in Delaware must comply with all applicable state and federal laws, including filing annual reports and paying taxes. Additionally, LLCs must keep accurate records of all business activities, while S-Corps must maintain proper corporate formalities.
What is a Limited Liability Company (LLC) in Delaware?
A Limited Liability Company (LLC) in Delaware is a legal business structure that combines the limited liability protection of a corporation with the flexibility and taxation of a partnership or sole proprietorship.
What is an S-Corp in Delaware?
An S-Corp in Delaware is a type of corporation in which its shareholders have limited liability and only one class of stock. It is beneficial for tax purposes because income and losses are passed through to the shareholders, rather than being taxed at the corporate level.
What are the benefits of forming an LLC vs S-Corp in Delaware?
The main benefits of forming an LLC in Delaware include limited liability protection, flexibility of management, and tax advantages. For S-Corps, the main benefit is the tax benefit of having income and losses passed through to the shareholders, rather than being taxed at the corporate level.
What is the process for forming an LLC or S-Corp in Delaware?
The process for forming an LLC or S-Corp in Delaware is fairly straightforward. First, the business must choose a name and file the appropriate paperwork with the Delaware Division of Corporations. Once the paperwork is filed and approved, the business can open a bank account and begin operating.
What are the filing fees associated with forming an LLC or S-Corp in Delaware?
The filing fees associated with forming an LLC or S-Corp in Delaware vary depending on the type of business entity and the number of shares being issued. Generally speaking, the filing fee for an LLC or S-Corp is $90.
Are there any additional costs associated with forming an LLC or S-Corp in Delaware?
Yes, in addition to the filing fee, there may be other associated costs, such as registered agent fees, annual franchise taxes, or other filing fees related to the type of business entity being formed.
Is there a minimum amount of capital required to form an LLC or S-Corp in Delaware?
No, there is no minimum amount of capital required to form an LLC or S-Corp in Delaware.
How long does it take to form an LLC or S-Corp in Delaware?
Generally, it takes 5-7 business days to form an LLC or S-Corp in Delaware.
What is the difference between a registered agent and a resident agent in Delaware?
A registered agent is an individual or business entity designated to receive legal documents on behalf of a business entity. A resident agent is an individual who is a resident of Delaware and is designated to receive legal documents on behalf of a business entity.
What are the advantages of forming an LLC or S-Corp in Delaware?
The advantages of forming an LLC or S-Corp in Delaware include limited liability protection, flexibility of management, and tax advantages.
What are the disadvantages of forming an LLC or S-Corp in Delaware?
The disadvantages of forming an LLC or S-Corp in Delaware include the cost of filing fees, the need to hire a registered agent, and the responsibility of filing annual reports and paying annual franchise taxes.
Do I need a lawyer to form an LLC or S-Corp in Delaware?
No, you do not need a lawyer to form an LLC or S-Corp in Delaware. However, it is always advisable to consult a lawyer to ensure that the formation process is done correctly and that all legal requirements are met.
Do I need to hold annual meetings for an LLC or S-Corp in Delaware?
No, there is no requirement to hold annual meetings for an LLC or S-Corp in Delaware.
Does my LLC or S-Corp in Delaware need to file annual reports?
Yes, LLCs and S-Corps in Delaware are required to file an annual report with the Delaware Division of Corporations.
Does my LLC or S-Corp in Delaware need to pay taxes?
Yes, LLCs and S-Corps in Delaware are required to pay state franchise taxes.
Can I form an LLC or S-Corp in Delaware without being physically present in the state?
Yes, you can form an LLC or S-Corp in Delaware without being physically present in the state.
How long does it take for my LLC or S-Corp to be approved in Delaware?
Generally, it takes 5-7 business days for an LLC or S-Corp to be approved in Delaware.
Can my Delaware LLC or S-Corp do business in other states?
Yes, an LLC or S-Corp formed in Delaware can do business in other states, but may be required to register with the other state in which it is doing business.
Is there an annual tax return filing requirement for LLCs and S-Corps in Delaware?
Yes, LLCs and S-Corps in Delaware are required to file an annual tax return.
Does my LLC or S-Corp in Delaware need to have a physical address in the state?
Yes, an LLC or S-Corp formed in Delaware is required to have a physical address in the state.
What is the Delaware Limited Liability Company Act?
The Delaware Limited Liability Company Act is the governing body of law that outlines the rights and obligations of LLCs formed in Delaware.
What is the Delaware Corporate Business Law?
The Delaware Corporate Business Law is the governing body of law that outlines the rights and obligations of corporations formed in Delaware.
Does my Delaware LLC or S-Corp need to appoint a registered agent?
Yes, LLCs and S-Corps formed in Delaware are required to appoint a registered agent.

Also Read

Why Delaware LLC Vs S Corp is So Important

One of the primary reasons why the choice between a Delaware LLC and an S Corp is so important is the impact it can have on the organization’s taxes. While both entities offer pass-through taxation, where business profits are reported on the owners’ personal tax returns, there are key differences in terms of taxation between the two. An S Corp provides its owners with the potential to save on self-employment taxes, as they can be paid a lower salary and receive dividends for the remaining profits. On the other hand, a Delaware LLC allows for greater flexibility in allocating profits and losses among its members, which can be advantageous in certain situations.

Another crucial factor to consider is the level of regulatory compliance and administrative requirements associated with each entity. Setting up an S Corp involves more formalities and ongoing compliance obligations, such as holding annual meetings, electing corporate officers, and maintaining corporate minutes. In contrast, a Delaware LLC provides more flexibility and simplicity in its operational structure, with fewer requirements to meet in terms of decision-making processes and record-keeping.

Furthermore, the liability protection offered by a Delaware LLC is often considered stronger than that of an S Corp. LLC owners, also known as members, are shielded from personal liability for the debts and obligations of the business, similar to shareholders of a corporation. However, some states do not offer the same level of liability protection for S Corp owners, as they may still be held personally liable for the entity’s debts in certain circumstances. This distinction can be crucial for entrepreneurs who want to protect their personal assets from potential risks associated with the business.

In addition to tax implications, regulatory requirements, and liability protection, the choice between a Delaware LLC and an S Corp can also impact your ability to attract investors and raise capital. Investors often prefer the corporate structure of an S Corp, as it provides a clear framework for issuing stock, distributing dividends, and setting corporate governance practices. On the other hand, the operational flexibility and internal management structure of a Delaware LLC may be more appealing to business owners who want to maintain greater control over their company without having to adhere to strict corporate formalities.

In conclusion, the decision between a Delaware LLC and an S Corp is a critical one that should not be taken lightly. It is essential to carefully evaluate the unique features and benefits of each entity in relation to your business goals, financial circumstances, and long-term growth plans. By understanding the implications of your choice, you can make an informed decision that best suits your needs and sets your business up for success in the years to come.

Conclusion

Even though you can choose a different corporate structure, consider whether it will primarily assist your organization. Striking the perfect balance between corporate benefits and legal protection that suits your particular needs is important. In forming an LLC or S-Corp in Delaware, you must be aware that every detail is well-formed so that starting your business will be successful. And, if you would like us to help you form a Delaware LLC and S-Corp in Delaware, read our other business guides.

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