Starting a business can be an exciting and rewarding experience for entrepreneurs. One essential consideration for any new business owner to make is the type of business structure to establish. One option that can confer tax benefits on a small business is forming an S corporation (S-corp). In this article, we will cover what an S-corp means, its benefits, and the steps involved in filing for a federal and state tax identification number in Delaware.
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What is an S-corp?
S-Corp is a type of corporation designed for small businesses with less than 100 shareholders. The primary purpose of forming an S-corp is to avail the privilege of limited liability, like what’s offered by the C corporations, while deducting business losses, profits, and credits when filing income tax returns (IRS form 1120S). Furthermore, business owners at S.c. incorporated businesses can collectively apply for an S-election by filling out the right tax forms and making their elections by March 15th each year. An S-election means that income flows directly from the company to shareholders, and they only pay applicable taxes on individual returns.
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Benefits of Starting an S-corp
The following are some advantages of starting an S corporation:
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- **Limitation of Liability:** One of the most significant advantages of starting an S corporation is that it offers limited liability protection similar to what is available for a C corporation. Shareholders are not entirely responsible for the debts and obligations of the corporation.
- **Tax Savings:** In an S-corp, shareholders report their share of the business's income, losses, deductions, and credits in their individual tax returns. As a result, there is no need to file a separate federal tax return for the corporation. S-corporations usually save money on taxes because the company does not pay tax directly.
- **Flexible Management:** S corporation operations are managed by a board of directors, which appoints officers to ensure the business runs smoothly. Several states can adopt a single-person leadership model.
- **Advancement Opportunities:** S corporations can provide a chance for expansion and leave the door open for raising capital through investments from venture capitalists, stocks, and private equites.
Steps to Start an S-corp in Delaware
Below is a step-by-step guide to follow when starting an S-corp in Delaware.
1. Select a Business Name: Every corporation in Delaware is governed directly under The Delaware General Corporation Law which requires a minimum limit for picking names. So it’s vital to check the Delaware Division of Corporations database to see if the name has been previously registered or reserved.
2. Select a Registered Agent: Choose a registered agent to represent the company while maintaining accurate and sufficient Delaware contact information.
3. File Certificate of Incorporation: You can complete the government paperwork by filing a Certificate of Incorporation with the Delaware Secretary of State. Once filed, we need to obtain acknowledgment from our lawyer and secretary before the initial admission fee has been collected, which usually falls between $90 to $120.
4. Apply for an EIN number: S corporations must obtain an Employer Identification Number (EIN) from Internal Revenue Service (IRS). You can apply either online using IRS's EIN application system or by mail using IRS SS-4 form.
5. File Form 2553 for S-corp election: To initiate tax requirements for an S-corp, the shareholders must file Form 2553 through to the IRS.
6. Register with the Department website to get started: After receiving two filings, both the Department and the Division will be required to review and approve the incorporation before a final green stamp approval is given.
Conclusion
Building up a company is a significant pledge and a potential resource for any person. The first step in building a successful S-corporation in Delaware, beyond selecting a business, is to obtain authorization by following the offered steps. By safeguarding both ownership opportunities and employee benefits, while legal compliance mapping out a revenue plan, building a Delaware S Corporation has become simpler. So, lay out those plans and shapes your company preference today.
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