Delaware S Corporation
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Should I form a Delaware S Corporation?
The S Corporation:
An "S Corporation" is a corporation that elects to be taxed under Subchapter S of the Internal Revenue Code (enacted in 1958 and periodically amended) and receives IRS approval of its request for Subchapter S status. As a legal entity (an artificial person), the S Corporation is separate and distinct from the corporation's owners (the stockholders).Delaware S Corporation
Advantages and Disadvantages
Advantages of the S Corporation:
- The independent life of the corporation makes possible its continuation, and the relatively undisturbed continued operation of the business regardless of incapacity or death of one or more stockholders.
- Fractional ownership shares are easily accommodated in the initial offering of stock.
- The purchase, sale, and gifting of stock make it possible to have changes in ownership without disturbing the corporation's ability to conduct business.
- The requirement that the corporation's finances and records be separate from the finances and records of stockholders reduces the risk of unrecognized equity liquidations.
- With only a few exceptions, under the Subchapter S election for taxation as a partnership the S corporation pays no income taxes and corporation income or loss is passed through direct to the stockholders.
- To the extent the corporate shield is maintained and other investments and savings of the stockholders are not at risk, the personal life of stockholders is simplified.
- The annual meetings of stockholders and consultations with legal counsel can provide stimulus for improved communication within the stockholder group (often a family group) and can provide more comprehensive guidance for management.
- Depending on the corporation's business record and the policies and practices of prospective lenders, access to credit and the ability to secure needed resources may be improved.
- Earnings representing "return on investment" (interest, rental payments, etc.) are not subject to self-employment tax as long as stockholder-employees receive adequate compensation for labor and management of the business.
Disadvantages of the S Corporation:
- Lenders may require personal guarantees from corporate officers as a condition of supplying credit, thus negating the limitation of liability.
- Conflicts or disagreements among the stockholders may immobilize decision making.
- Restrictions on the sale of stock and/or buy-back agreements included in the bylaws may prevent minority stockholders from being able to recover the value of their investment in the corporation.
- Through the processes of gifting and inheritance, stock ownership can become divided among many persons who are not active in the business and they may become a voting block that does not support needs and decisions believed desirable by managing stockholders.
- Over time, corporation paid benefits for stockholder-employees may become costly and exceed the ability of the business to pay.
- Employment benefits such as life insurance, health insurance, and housing costs are taxable income to stockholder employees with 2 percent or more stock ownership and to employees who are directly related to persons owning 2 percent or more of the corporation stock.
- If appreciated assets are owned by the corporation and the corporation is dissolved, significant income taxes on the appreciation amount will be generated.
Delaware’s 2011 Business Tax Climate Ranks 8th
Delaware ranks 8th in the Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property. The ranks of neighboring states were as follows: Pennsylvania (26th), New Jersey (48th), and Maryland (44th).Delaware's Individual Income Tax System Delaware's personal income tax system consists of six brackets and a top rate of 5.95% kicking in at an income level of $60,000. That top rate ranks 15th highest among states levying an individual income tax. In 2008, state-level individual income tax collections were $1,157 per person, which ranked 13th highest nationally.
Delaware's Corporate Income Collections
Delaware's corporate tax structure consists of a flat rate of 8.7% on all corporate income. Among states levying corporate income taxes, Delaware's rate ranks 10th highest. In 2008, state-level corporate tax collections (excluding local taxes) were $355 per capita, ranking 3rd highest among states that tax corporate income.Delaware Sales and Excise Taxes
Delaware levies a general sales or use tax at a rate of 1.92 percent, well below the national median of 5.85% and the lowest rate of all states that levy this particular tax. In 2007 combined state and local general and selective sales tax collections were $544 per person, which ranks 49th nationally. Delaware's gasoline tax stands at 23 cents per gallon (28th highest nationally), while its cigarette tax stands at $1.60 per pack of twenty (ranked 17th nationally). The gasoline tax was adopted in 1923, and the cigarette tax in 1943.Delaware Property Taxes Among Nation’s Lowest
Delaware's local governments collected $ 626.90 per capita in property taxes during fiscal year 2006, which is the latest year available from the Census Bureau. Delaware is one of the 13 states that collect no state-level property taxes. Delaware’s per capita property tax collections rank 43rd nationally.Home | Delaware S Corporation advantages and disadvantages | Site-Map