Delaware may be small in size, but some of America’s most significant companies have corporate offices there — from Google and Amazon to Walmart. It’s no surprise these large businesses chose Delaware as a home for much of their business operations because the state offers attractive business incentives, tax advantages, and a supportive business environment.
While Delaware has a lot to offer, how you structure your business can impact the amount of money it can earn. By structuring your small business as an S corporation (S corp) in Delaware, you can benefit from incentives and a lower-than-average income tax, which will save you money come tax season.
Read on to learn how to set up your small business as a Delaware S corp as well as everything you need to do to keep it in good standing.
Want to form an S corp elsewhere? Check out our other How to Start an S Corp guides to learn more.
We recommend using a professional formation service like Tailor Brands to get your S corp up and running in no time.
Factors to Consider Before Starting an S Corp in Delaware
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by a limited liability company (LLC) or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a Delaware S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
How to Form a Delaware S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the Internal Revenue Service (IRS) when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Delaware
Starting a Delaware LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Tailor Brands to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Certificate of Formation
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Delaware.
Be sure to choose a name that complies with Delaware naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a Delaware LLC:
- Your name must include the phrase “limited liability company,” or one of its abbreviations (LLC or L.L.C.).
- Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
- Your name may contain the following words: Company, Association, Club, Foundation, Fund, Institute, Society, Union, Syndicate, Limited, Public Benefit, or Trust.
- Your name cannot contain the word “bank,” or any variation unless the company is authorized as a bank by the state. However, the word “bank,” or any variation, can be used if the context clearly doesn’t refer to a banking business or mislead the public about the nature of the business. An example of acceptable use would be Bank Shot Basketball LLC.
- Your name must be distinguishable from any existing business in the state.
You can also read the Delaware state statute about LLC naming guidelines for more information.
2. Is the name available in Delaware? You can use the general information name search on the Delaware Division of Corporations website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Find a Domain Now
Step 2: Choose Your Delaware Registered Agent
You must elect a registered agent for your Delaware LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Certificate of Formation.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Step 3: File the Delaware LLC Certificate of Formation
The Delaware Certificate of Formation is used to officially register an LLC.
OPTION 1: File Online With the Delaware Division of Corporations
You will need to download the pre-filled Certificate of Formation, sign it, and upload it for filing.
- OR -
OPTION 2: File by Mail
State Filing Cost: $90, payable to the Delaware Department of State (Nonrefundable)
Delaware Division of Corporations
401 Federal St.
Dover, DE 19901
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Delaware LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Delaware S corp for you, so you can focus on the things that matter most — growing your business.
Keep Your Delaware S Corp Compliant
After you form your business and elect to have the IRS tax it as an S corp, you’ll want to ensure you follow Delaware state laws in order to keep it compliant. This’ll require you to pay your annual franchise tax as well as all applicable state and local taxes each year.
Delaware S Annual Franchise Tax
Because your Delaware S corp is, technically, an LLC taxed as an S corp, you’ll need to pay Delaware’s annual franchise tax. This is a $300 flat-rate tax due by June 1 each year to the Delaware Division of Corporations.
You can file your Annual Franchise Tax Report online, starting the year following your business’s formation. If you formed your business in 2023, for example, you must pay the annual franchise tax before June 1, 2024.
Delaware S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Delaware S corp owners can expect to pay the following taxes:
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Delaware Income Taxes
Delaware has a graduated income tax, ranging from 2% to 7% based on an individual’s income level. While some states have no income tax, others levy income tax rates higher than 9%. Delaware’s graduated state income tax is fairly standard when compared to other states.
Additional Income Taxes
Delaware’s Wilmington tax jurisdiction has an additional income tax rate of 1.25% that area residents must pay on top of the state income tax.
Delaware Sales and Use Tax
Delaware doesn’t have a state or local sales tax. Only four states — Delaware, New Hampshire, Montana, and Oregon — lack state and/or local sales taxes. This tax incentive helps make Delaware a great state in which to form a business.
Delaware Gross Receipts Tax
While Delaware doesn’t impose a sales tax, it does have a gross receipts tax. Businesses must pay this tax on a quarterly or monthly basis, depending on their total revenue, to the Delaware Division of Revenue. Delaware’s gross receipts tax typically is less than 1% of all revenue.
For more information, visit the Delaware Division of Revenue website.
Additional State Taxes
The Delaware Division of Revenue also handles other state-specific taxes your business may need to pay, depending on its industry, location, and number of employees. Some examples of these additional taxes include:
- Cigarette & Other Tobacco Products Tax
- Alcohol Tax
- Motor Vehicle Handling Fee
- Insurance Premiums Tax
Visit the Delaware Division of Revenue website for more information on specific permits and taxes required based on your business’s industry.
Delaware Local Taxes
Whether you locate your business in Wilmington, Dover, or a smaller town within Delaware, each local jurisdiction may have its own laws governing businesses. We recommend you seek out resources in your community to learn more about local laws and regulations.
Start a Delaware S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
Are taxes for LLCs and S corps the same?
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
What is a reasonable salary for an S corp?
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
What is a distribution?
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
Can I still use my DBA name if I elect to be an S corp?
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
What types of businesses may elect S corp status in Delaware?
Delaware is home to businesses in many major industries — from agriculture and fishing to manufacturing. You can form an S corp in many industries as long as your business meets the requirements set by the IRS.
Is it expensive to start an S corp in Delaware?
As a small business owner, smart budgeting is vital to the success of your company. Forming an S corp in Delaware is relatively affordable with a $90 fee to file your LLC Certificate of Formation with the Delaware Division of Corporations. To maintain your S corp, you’ll need to pay another $300 each year for Delaware’s annual franchise tax.