LLC vs S-Corp in Delaware

Delaware has a personal income tax with a graduated rate structure and a corporate income tax, plus an annual franchise tax and alternative entity tax on Delaware-formed entities. The Delaware Secretary of State Division of Corporations handles entity formation. The IRS handles federal tax classification via Form 8832 and Form 2553. A Delaware LLC can elect to be taxed as an S corporation for federal purposes. Delaware LLC basics. - Certificate of Formation filed with the Delaware Secretary of State Division of Corporations, under the Delaware Limited Liability Company Act (6 Del. C. Chapter 18). - Current formation filing fee is $110 as published on the Division of Corporations fee schedule. Source: Delaware Division of Corporations (https://corp.delaware.gov/howtoform/) and current fee schedule (https://corp.delaware.gov/feesched/). - Delaware LLCs must pay an Annual Alternative Entity Tax of $300 (flat) due June 1 each year to the Division of Corporations. Source: Delaware Division of Corporations, Annual Tax (https://corp.delaware.gov/paytaxes/). - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with IRS Form 2553. Delaware state tax treatment. - Pass-through entities (LLCs taxed as partnerships, S corporations) file informational returns with the Delaware Division of Revenue. Income flows through to members or shareholders, who pay Delaware personal income tax on Delaware-source income. Source: Delaware Division of Revenue, Business Taxes (https://revenue.delaware.gov/business-tax/). - Delaware corporate income tax applies to C corporations at 8.7% of federal taxable income with Delaware modifications. Federal S corp election is respected for Delaware purposes; an S corporation is not subject to Delaware corporate income tax on pass-through earnings, but may owe Delaware's corporate franchise tax (for corporations) or the alternative entity tax (for LLCs). - Delaware corporate franchise tax (for corporations): minimum $175 to $400 depending on method; maximum can run into hundreds of thousands of dollars under the authorized-shares method for large corporations. Source: Delaware Division of Corporations, Franchise Tax (https://corp.delaware.gov/paytaxes/). Delaware S corp basics. - Federal S corp election flows through to federal income tax only. Delaware follows the federal S election. - Payroll. An S corp must pay its owner-employee a reasonable W-2 salary. Delaware has unemployment insurance through the Department of Labor in addition to federal Social Security, Medicare, and FUTA. Why a Delaware trades shop might elect S corp. Primarily for federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids federal self-employment tax. Delaware's personal income tax applies either way. Note: a Delaware trades shop that is organized as an LLC pays the $300 alternative entity tax; organizing as a corporation and electing S corp status pays the state corporate franchise tax (minimum $175 to $400) instead. Pick the structure with the CPA after running both. Rule of thumb. Start as a Delaware LLC for simplicity and cost. When annual profit after a reasonable owner wage is high enough that federal payroll-tax savings clear payroll, retirement plan, and accounting costs, elect S corp and re-evaluate whether to keep the LLC structure (with S corp federal election) or convert to a corporation.