LLC vs. S Corp in Delaware

What are your goals as an entrepreneur? Are you looking to run a new business that protects you from personal liability? Do you want to build a business that’s easy to pass on to your family? The structure you choose for your new venture can help or hinder your business goals. This is why it’s important to research which type of business structure is the best for you. 

There are many options for the structure of your business, including limited liability companies (LLCs), partnerships, sole proprietorships, and corporations. In this article, we review the merits of running an LLC vs an S Corp in Delaware. 

LLC vs. S Corp: Which is better in Delaware? 

LLCs and S Corporations serve very different purposes in the business world. An LLC is a stand-alone business entity, and an S Corporation is a tax designation different kinds of business entities can elect. In fact, you can elect to give your LLC S Corporation tax status. When comparing an S Corp vs an LLC in Delaware, it’s best to compare an LLC with S Corporation status to an LLC without that status. 

What are the tax differences between LLCs and S Corps in Delaware? 

Often, a big deciding factor when comparing an S Corporation vs an LLC in Delaware is your potential tax liabilities with either. You can have vastly different tax liabilities based on whether you choose a standard LLC or an S Corporation LLC. 

Federal Taxes

Pass-Through Taxation

When it comes to federal income taxes, LLCs and S Corporations are both subject to pass-through taxation. Pass-through taxation means that LLCs and S Corporations don’t pay federal income taxes at the entity level. Only LLC and S Corporation owners pay federal income taxes on their portions of the income from the businesses. The pass-through taxation that LLCs and S Corporations enjoy is a huge draw for many new business owners, especially when comparing an LLC vs S Corp vs C Corp in Delaware. 

C Corporations generally have heftier federal income tax liabilities because they’re subject to double taxation. Double taxation means that a C Corporation must pay income taxes at the entity level, and its individual shareholders must pay income taxes on their shares of the business income. 

Self-Employment Taxation

The most significant tax differences many business owners see between LLCs and S Corporations are the self-employment tax differences. If you’re a business owner who performs services for your business, some or all of your business income is subject to self-employment taxes. Owners (also called members) of standard LLCs have to include their shares of LLC income and their guaranteed payments in their taxable wages.

However, owners of an S Corporation can choose to declare only a portion of their business income as taxable wages. S Corporation owners can then classify the rest of their business income as distributions not subject to employment taxes. To take advantage of this S Corporation benefit, the amount of wages you declare has to be reasonable. 

Delaware Taxes

There aren’t significant tax differences between standard LLCs and S Corporation LLCs at the state level. All Delaware LLCs have to pay an annual tax of $300. And if your LLC or S Corp in Delaware sells goods or provides services, you have to pay a Gross Receipts Tax to the Department of Revenue. 

Although a standard LLC is also a pass-through tax entity at the state level, it’s important to be aware about how LLC ownership affects your personal income tax liabilities. You have to report all your LLC profits and losses on your personal income tax return. And you have to pay income taxes on all your profits, even if you choose to leave some profits in your LLC’s account.

How do Delaware LLC and S Corp ownership requirements compare? 

When it comes to an LLC vs an S Corp in Delaware, both business types have strict ownership requirements. It’s difficult to transfer ownership of an LLC because Delaware’s default rules require all LLC members to consent before they admit a new member. And it’s difficult to become an owner of an S Corporation because there’s a limitation on how many owners an S Corporation can have and who the owners can be. 

An S Corporation can’t have more than 100 owners, and none of the owners can be:

• Corporations
• Partnerships
• Non-resident immigrants
• Certain financial institutions
• Insurance companies
• Domestic international sales corporations

However, an S corp can own other businesses. Also, S Corporations can’t have more than one class of stock. 

These ownership restrictions can have significant and differing impacts on your goals and your ability to raise capital. It’s important to speak to legal and financial experts about whether either of these business types is the right choice for you. 

How do Delaware LLCs and S Corps handle liability protection?

If you own an LLC in Delaware, you normally have no personal liability for the LLC’s financial and legal obligations. An S Corporation is a tax designation and not a separate business entity, so it doesn’t offer any liability protection on its own. Any liability protection you receive from an S Corporation comes from the underlying business entity that elected the tax status. If you have an LLC that elects S Corp status for taxation, you will have the liability protection provided by the LLC.

Which is easier to file in Delaware: LLCs or S Corps?

You have to set up your business entity and then file extra paperwork to elect S Corporation status, so forming an S Corporation is more time consuming. 

To set up an LLC in Delaware, you have to file a Certificate of Formation with the Delaware Secretary of State. You must include certain contact and identifying information for your LLC in your Certificate of Formation and pay an accompanying filing fee. To give your LLC S Corporation status, you have to file Forms 8832 and 2553 with the IRS. 

After you’ve formed your LLC, you can expect your business to go through changes. If information in your Certificate of Formation changes, you need to file a Certificate of Amendment with the state to keep your LLC legally compliant. Keeping your LLC up to date is easy when you use our Worry-Free Compliance Service. Our service keeps track of your compliance deadlines and files two business amendments for you per year. 

Can I convert my Delaware LLC to an S Corp? 

Yes. If your LLC meets S Corporation ownership requirements, you can convert it to an S Corporation at any time. 

How do I convert my Delaware LLC to an S Corp? 

After you file the proper state paperwork to make your LLC official, you have to file Form 8832 and Form 2253 with the IRS to elect S Corporation status. Form 8832 tells the IRS that you want your LLC to be taxed as a corporation instead of a partnership. And Form 2553 tells the IRS that you want your LLC to have S Corporation status. 

Do I need to change my designator if I do? 

No. An S Corporation is just a tax status, so your business is still an LLC under state law. 

What is the best time for an LLC to elect S Corporation status?

Three’s no set “best time” for every LLC to elect S Corporation status. The best time depends on your specific needs. It’s often easiest to make an S Corporation election immediately after forming your LLC, but you need to make sure you’re ready to fulfill all of the S Corporation requirements. Legal and tax professionals can help you decide if it’s the right time for you to run your business as an S Corporation. If you’re ready to run an S Corporation, you have to file your election paperwork within the first two months and 15 days of the tax year in which you want the election to start.