Delaware S Corporation Advantages and Disadvantages
Delaware S Corporation advantages and disadvantages
-Delaware is considered pro-business, which isn't something you find in all states. Indeed, Delaware takes business seriously. Consider Delaware's favorable tax climate. Its corporate tax rate is only 8.7% on net income. In addition, there's no sales tax or equipment tax. Delaware's Chancery Court is the international forum for hearing corporate disputes.
The main advantage associated with the S Corporation
is that the income passes through to the shareholders, therefore avoiding a perceived double taxation of a C-Corporation.
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 2012 Business Tax Climate Ranks 12th
Delaware ranks 12th in the Tax Foundation's State 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.
Tax Freedom Day Arrives on April 10 in Delaware
Tax Freedom Day is the day when Americans finally have earned enough money to pay off their total tax bill for the year. In 2011, Delaware taxpayers work until April 10 (ranked 21st highest nationally) to pay their total tax bill, 9 days after national Tax Freedom Day (April 12).
Delaware's State and Local Tax Burden Slightly Below National Average
Delaware's 2009 state and local tax burden of 9.6% of income is slightly below the national average of 9.8%. Delaware's tax burden has decreased overall from 9.8% (26th nationally) in 1977 to 9.6% (23rd nationally) in 2009. Delaware taxpayers pay $4,091 per capita in state and local taxes.Reference - Tax Foundation
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