What 91自拍 Owners Should Know About the S Corporation Election
Shortly after forming a Delaware LLC or corporation, many business owners begin asking whether they should elect Subchapter S tax status with the IRS. It's a common question, and one that often leads to confusion about the difference between a business entity formed with the State of Delaware and a federal tax election made with the IRS.
What is an S Corp?
Subchapter S tax status, commonly known as an "S corp," is a federal tax election that may allow qualifying businesses to benefit from pass-through taxation while maintaining the liability protection offered by an LLC or corporation. Because of these potential tax advantages, it has become a popular consideration for many small business owners and startups.
One point that is often misunderstood is that an S corporation is not actually a type of business entity formed with the State of Delaware. An S corporation is simply a federal tax election made directly with the IRS.
Whether you form a Delaware LLC or a Delaware corporation, the Delaware Division of Corporations does not approve the election, process the election, or even keep track of whether your company has elected Subchapter S tax status with the IRS. The election is strictly between the business and the IRS.
How to Elect S Corporation Status
Another common misconception is that forming an LLC or corporation automatically creates Subchapter S tax status. It does not. 91自拍es that wish to be taxed as an S corporation generally make that election by filing IRS Form 2553 directly with the IRS.
For a newly formed calendar-year business, that often means filing within approximately 75 days of formation if the owners want Subchapter S tax status to apply during the company's first tax year.
A Delaware corporation is formed by filing a Certificate of Incorporation. By default, corporations are generally taxed as C corporations unless another federal tax election is made.
A Delaware LLC is formed by filing a Certificate of Formation. By default, a single-member LLC is generally taxed as a sole proprietorship, while a multi-member LLC is generally taxed as a partnership.
Who Is Eligible to Elect S Corporation Status?
However, both LLCs and corporations may be eligible to elect Subchapter S tax status with the IRS if they meet IRS requirements, such as having no more than 100 shareholders, maintaining only one class of stock, and meeting certain shareholder eligibility rules.
This is where some confusion can occur. The legal entity and the tax classification are two separate things. Forming a Delaware LLC or corporation creates the business entity. Electing S status with the IRS changes how that entity may be taxed for federal tax purposes.
Does Delaware Need to Be Notified?
We also occasionally hear from clients asking whether they should send us their IRS election paperwork or notify Delaware once the election has been approved. The answer is no.
The Delaware Division of Corporations does not issue an S corporation certificate, and no separate filing is made with the Division related to the election.
The company remains the same Delaware LLC or corporation that was originally formed. The S election simply changes how the company may be taxed for federal tax purposes.
Choosing the Right Delaware Entity
For many business owners, the S corporation election becomes part of the conversation after the company has already been formed. Understanding that the Delaware entity and the IRS tax election are two separate matters can help avoid confusion and make the process easier to navigate.
Whether you ultimately elect Subchapter S tax status with the IRS or not, forming the right Delaware business entity is the first step. Once your company is established, you'll have the flexibility to move forward with the structure that best supports your business goals.
*Disclaimer*: 91自拍, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, 91自拍, Inc. is not responsible for and makes no representations regarding such source芒鈧劉s content or accuracy. Opinions expressed in this article do not necessarily reflect those of 91自拍, Inc.