How to Start an S-Corp in Delaware

Delaware, popularly known as The First State, offers a bunch of benefits for business owners, especially the state capital Dover has a lot to offer to the rising entrepreneurs in the state. If you want to start a business in Delaware, you must choose an appropriate corporate structure. You can have a corporation or a sole proprietorship or set up an LLC in Delaware. There are a few guidelines that you should be aware of when it comes to starting an S-Corporation. In Delaware, S-Corporation is businesses’ most common corporate structure, especially start-ups. It was developed in order to give companies limited liability protection while preserving the advantages of being a distinct legal organization.

In this article, you will learn about how to start an s-corporation in Delaware. You will also learn whether an s-corporate business structure suits your business. Please read all the points carefully before starting your business in Delaware.

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 both corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

If you want an S corp status for your business, you can always form an LLC to protect your personal assets from business debts. It takes some basic steps to have a successful s-corporation in Delaware. S-Corps do pay corporate income taxes, but they are still treated as disregarded companies for federal tax purposes.

S-corps pay corporate taxes that LLCs do not have to pay. If you want to have an S-corp status, then we would recommend you have an LLC instead. This will protect your personal assets from your business liabilities and you don’t have to pay any corporate taxes.
–LLCBuddy Editorial Team

Limitation and Requirements of S-Corp in Delaware

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

Be a domestic corporation.
Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
Have just one type of stock.
Have a maximum of 100 shareholders or members.
Have only permitted individuals, certain trusts, and estates as stockholders or members.

If you are qualified for the limitations and requirements, you can apply for an S-Corp in Delaware.

How to Start an S-Corporation in Delaware?

To create S-Corp in Delaware, you must follow the below guidelines that include forming a business name, hiring a Registered Agent, filing your Certificate of Formation, creating an operating agreement in Delaware, requesting an EIN, filing a form 2553.

Step 1: Register a Business Name in Delaware

After you have decided on the idea to start an S-Corp in Delaware, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an LLC, there is a complete guide on Delaware LLC name guidelines for a proper LLC name. Here are some guidelines you must follow while naming your S-corp.

Avoid profanities
The name should be available, and no other entity should have the same name in Delaware.
Limit of restricted words that need a license in Delaware, for example, doctors, attorneys, etc.
Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hiring the Delaware Registered Agent

The next step in starting an S-corp in Delaware is hiring a Delaware Registered Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence in Delaware. Forming an LLC and an S-corp will be easier if you have Registered Agent in Delaware.

Step 3: File Your Delaware Certificate of Formation

The Certificate of Formation is an important document to start your limited liability company (LLC). Delaware Certificate of Formation is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. In order for the “Certificate of Formation” to be filed, you need to pay a filing fee to the state. In Delaware, the filing fee is $90.

In California, along with the Certificate of Formation, you must send the Statement of Information to file your company. The statement of information is a mandatory document in California, but other states do not have this document.

Step 4: Creating an Operating Agreement in Delaware

After you have filed your Certificate of Formation in Delaware, the next step is to create an LLC operating agreement in Delaware. The Delaware LLC operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following-

Article I: Organization
Article II: Management and Voting
Article III: Capital Contributions
Article IV: Distributions
Article V: Membership Changes
Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure. For more details about how an operating agreement works, please check Operating Agreement.

Step 5: Request for EIN in Delaware

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in Delaware can be through the following:

Apply Online- You can apply for EIN online, the most desirable and fastest method for users.
Apply by Fax- Another method of obtaining EIN is to fax Form SS-4 (PDF) after entering all the correct information to (855) 641-6935.
Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is 4 weeks.
Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

If you would like to be assisted in getting an EIN in the Internal Revenue Service, we can get your EIN for you. Our EIN service is quick and hassle-free. For more details about EIN for your business, check why you need EIN.

Step 6: File Form 2553 for Your S-Corp Business in Delaware

Once you have obtained your EIN and Certificate of Formation to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. 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 send your form 2553 to the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734.

Advantages of Starting an S-Corporation in Delaware

Filing an S-Corp in Delaware has numerous benefits and advantages.

Writing Off Losses: With S-corp, owners can deduct business losses from their individual income statements. If the company loses money in the first few years, it may balance its other sources of revenue. Even so, understand the shareholder loss limitations set by the IRS.

Pass-Through Taxation: Starting an S-Corp is the widely known advantage in forming this kind of business structure since an s-corp uses a pass-through taxation structure. The company does not pay twice the tax in this kind of taxation. Because of this structure, most start-ups and entrepreneurs in Delaware apply for an S-Corp LLC.

Qualified Business Income Deduction: A qualified business income, or QBI, is the total of all qualified items of income, gain, deduction, and loss from any qualified trade or business, including S-Corp. With this, S corp owners may deduct up to 20% of their eligible earnings under the Tax Cuts and Jobs Act.

FAQs

What is required to start an S-Corp in Delaware?

To start an S-Corp in Delaware, you must first file a Certificate of Incorporation with the Delaware Secretary of State, then obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS), and obtain a Delaware Division of Corporations Charter Number.

What are the benefits of forming an S-Corp in Delaware?

Delaware is renowned for its business-friendly laws and its highly sophisticated court system. The Delaware General Corporation Law is recognized as one of the most sophisticated and comprehensive pieces of corporate legislation in the world. Delaware is also known for its low taxes and flexible regulations, making it an attractive choice for forming an S-Corp.

How much does it cost to form an S-Corp in Delaware?

The cost to form an S-Corp in Delaware depends on several factors, including the type of business, the number of shareholders, and the amount of paperwork required. Generally, the cost to form an S-Corp in Delaware ranges from $100 to $1000.

What documents are required to form an S-Corp in Delaware?

The documents required to form an S-Corp in Delaware include a Certificate of Incorporation, an Employer Identification Number (EIN) from the Internal Revenue Service (IRS), and a Delaware Division of Corporations Charter Number. In addition, you may need to register with the Delaware Department of Revenue, obtain a business license, and complete any required paperwork for the business.

Is it necessary to have a physical office in Delaware to form an S-Corp?

No, it is not necessary to have a physical office in Delaware to form an S-Corp. However, you may need to register with the Delaware Department of Revenue and obtain a business license.

How long does it take to form an S-Corp in Delaware?

The process of forming an S-Corp in Delaware typically takes between two to four weeks. This includes the time it takes to file the required documents with the Delaware Secretary of State and obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).

What are the rules for taxation of an S-Corp in Delaware?

The taxation of an S-Corp in Delaware is determined by the Delaware Division of Corporations. Generally, an S-Corp is not subject to state income taxes and all income is passed through to the shareholders, who must report and pay taxes on the income.

Do I need to register my S-Corp in Delaware?

Yes, you must register your S-Corp in Delaware with the Delaware Division of Corporations. This includes filing a Certificate of Incorporation and obtaining a Delaware Division of Corporations Charter Number.

Do I need a registered agent in Delaware to form an S-Corp?

Yes, you must appoint a registered agent in Delaware to form an S-Corp. A registered agent is responsible for receiving important legal documents on behalf of the business.

Are there any reporting requirements for an S-Corp in Delaware?

Yes, there are reporting requirements for an S-Corp in Delaware. This includes filing an annual report with the Delaware Division of Corporations, as well as filing any required state or federal taxes.

Are there any special taxes or fees for an S-Corp in Delaware?

Yes, there are special taxes and fees for an S-Corp in Delaware. This includes filing an annual franchise tax report with the Delaware Division of Revenue, which is based on the company’s total assets. There may also be other taxes and fees, depending on the type of business and other factors.

What are the corporate governance requirements for an S-Corp in Delaware?

The corporate governance requirements for an S-Corp in Delaware are outlined in the Delaware General Corporation Law. Generally, an S-Corp is required to have a board of directors, officers, and shareholders. The board of directors is responsible for overseeing the management of the business and making decisions in the best interests of the company.

What is the process for making changes to an S-Corp in Delaware?

The process for making changes to an S-Corp in Delaware depends on the type of change. Generally, any changes to the company’s structure, such as the number of shareholders or the addition of new directors, must be approved by the board of directors and filed with the Delaware Secretary of State.

Can I transfer ownership of an S-Corp in Delaware?

Yes, you can transfer ownership of an S-Corp in Delaware. This can be done through a stock transfer, which must be approved by the board of directors and filed with the Delaware Secretary of State.

What is the Delaware Division of Corporations?

The Delaware Division of Corporations is a government agency that oversees the formation and registration of businesses in Delaware. The Division of Corporations is responsible for filing the required documents for forming an S-Corp in Delaware, such as the Certificate of Incorporation and the Delaware Division of Corporations Charter Number.

Is there a fee to file documents with the Delaware Division of Corporations?

Yes, there is a fee to file documents with the Delaware Division of Corporations. The filing fee varies depending on the type of document being filed.

Can I form an S-Corp in Delaware without an attorney?

Yes, it is possible to form an S-Corp in Delaware without an attorney. However, due to the complexity of the process, it is recommended that you consult with an attorney to ensure that all of the necessary documents are completed correctly.

What are the advantages of forming an S-Corp in Delaware?

The advantages of forming an S-Corp in Delaware include the low taxes, flexible regulations, and highly sophisticated court system. In addition, Delaware’s business-friendly laws are widely recognized and make it an attractive choice for businesses.

What happens if I fail to comply with the regulations for an S-Corp in Delaware?

If you fail to comply with the regulations for an S-Corp in Delaware, you may be subject to penalties or fines. It is important to ensure that you are in compliance with all of the regulations to avoid any potential consequences.

What is the Delaware Registered Agent requirement?

The Delaware Registered Agent requirement states that all businesses must appoint a registered agent located in Delaware. The registered agent is responsible for receiving important legal documents on behalf of the business.

Can I form an S-Corp in Delaware as a foreign company?

Yes, it is possible to form an S-Corp in Delaware as a foreign company. However, you may need to obtain a Certificate of Authority from the Delaware Division of Corporations.

Do I need to obtain a business license to form an S-Corp in Delaware?

Yes, you may need to obtain a business license to form an S-Corp in Delaware. This varies depending on the type of business and other factors.

Are there any restrictions on who can be shareholders of an S-Corp in Delaware?

Yes, there are restrictions on who can be shareholders of an S-Corp in Delaware. Generally, only individuals, certain trusts, and certain corporations can be shareholders of an S-Corp.

What is the process for dissolving an S-Corp in Delaware?

The process for dissolving an S-Corp in Delaware involves filing a Certificate of Dissolution with the Delaware Secretary of State. Once the Certificate of Dissolution is filed, the company’s assets will be distributed according to the company’s operating agreement.

Are there any restrictions on the sale of an S-Corp in Delaware?

Yes, there are restrictions on the sale of an S-Corp in Delaware. Generally, the sale of an S-Corp must be approved by the board of directors and the Delaware Secretary of State.

How do I obtain a Delaware Division of Corporations Charter Number?

To obtain a Delaware Division of Corporations Charter Number, you must file a Certificate of Incorporation with the Delaware Secretary of State. Once the Certificate of Incorporation is filed, the Delaware Division of Corporations will issue a Charter Number.

What are the requirements for keeping records for an S-Corp in Delaware?

The requirements for keeping records for an S-Corp in Delaware vary depending on the type of business. Generally, an S-Corp must keep records of all corporate documents, financial records, and other important documents related to the business.

Is there an annual filing requirement for an S-Corp in Delaware?

Yes, an S-Corp in Delaware must file an Annual Report with the Delaware Division of Corporations each year. The Annual Report is due by the last day of the anniversary month of the company’s formation.

What is the Delaware Franchise Tax?

The Delaware Franchise Tax is an annual tax imposed by the Delaware Division of Revenue on Delaware corporations. The tax is based on the company’s total assets, and the amount due must be paid by the last day of the anniversary month of the company’s formation.

Are there any other taxes or fees that I need to pay for an S-Corp in Delaware?

Yes, there may be other taxes and fees that you need to pay for an S-Corp in Delaware. This includes any state or federal taxes, as well as any local taxes or fees.

Why Delaware S Corporation is So Important

An S Corporation is a unique type of corporation that provides its owners with limited liability protection, like a traditional corporation, but is treated as a pass-through entity for tax purposes. This means that the S Corporation itself does not pay income taxes; instead, the owners report the corporation’s income and losses on their individual tax returns. This can result in significant tax savings for the owners, as they may be able to avoid double taxation on profits.

Delaware’s appeal for S Corporations stems from its favorable business laws and corporate-friendly environment. The state boasts a long history of pro-business legislation, including strong legal protection for business owners and minimal bureaucracy for company formation and operation. This makes Delaware an attractive option for businesses looking to take advantage of the benefits that come with being an S Corporation.

One of the key advantages of choosing Delaware as the state of incorporation for an S Corporation is its well-established legal system. Delaware’s Chancery Court is widely recognized as one of the most sophisticated business courts in the country, with highly experienced judges who are well-versed in corporate law. This means that businesses operating in Delaware can rest assured that any legal disputes will be handled swiftly and fairly, minimizing potential disruptions to their operations.

Additionally, Delaware’s corporate laws offer a high degree of flexibility and certainty for businesses. The state allows for a wide range of corporate structures and provides clear guidelines on issues such as corporate governance, shareholder rights, and director duties. This makes it easier for businesses to navigate the complex legal landscape and focus on growing their operations without getting bogged down in legal red tape.

Another benefit of choosing Delaware as the state of incorporation for an S Corporation is the state’s reputation as a business-friendly jurisdiction. Delaware is home to numerous Fortune 500 companies and has established itself as a hub for corporate headquarters. This has created a thriving ecosystem of legal, financial, and business services that cater to the needs of businesses operating in the state. Entrepreneurs looking to start an S Corporation in Delaware can tap into this network of expertise and resources to help them navigate the complexities of running a successful business.

In conclusion, the Delaware S Corporation offers entrepreneurs a unique combination of legal protections, tax benefits, and business-friendly environment that make it a compelling choice for businesses of all sizes. By choosing Delaware as the state of incorporation, business owners can take advantage of the state’s established legal system, flexible corporate laws, and robust business ecosystem to set themselves up for long-term success.

Conclusion

In conclusion, starting an S-corp in Delaware is a strategic choice for entrepreneurs seeking the benefits of limited liability and favorable tax treatment. One can successfully establish an S-corp by following the outlined steps, including selecting a unique name, filing the Certificate of Incorporation, obtaining necessary licenses, and adhering to state-specific regulations. Ultimately, this corporate structure offers a strong foundation for business growth and protection, making it a worthwhile consideration for those looking to launch a venture in Delaware.