Incorporating your business offers the benefit of limiting your personal liability, but the drawback of being subject to two levels of income tax. However, if your business qualifies, you can incorporate and elect S-corp tax status so that the income or loss avoids the corporate tax and passes through directly to your personal return. Only after incorporating at the state level can you elect S-corp federal tax status.
Delaware has different incorporation forms depending on whether your company will issue stock or not. Both forms require your corporation's name and address, the incorporator's name and address, and the corporation's purpose. For stock corporations, the form requires the number of shares the corporation can issue. For non-stock corporations, you must include the conditions for membership. If you wish, you can add additional terms to your certificate of incorporation on additional pages, such as shareholder agreements that prevent the transfer of shares to people or entities that would make the S-corp election invalid.
In addition to the form, include a filing memo that states your name, address and telephone or fax number, so that the Division of Corporations can contact you, as well as the business information. In addition, you have the option to request expedited filing for an additional fee. When complete, fax or mail your completed memo and certificate of incorporation to the Division of Corporations: (302)-739-3812, or Division of Corporations, John G. Townsend Building, 401 Federal Street, Suite 4, Dover, DE 19901.
Not every corporation is eligible to elect S-corp tax status. To qualify, the company must have fewer than 100 shareholders and each of the shareholders must be a U.S. citizen or resident; or a qualifying estate, trust, or nonprofit organization. If even one shareholder doesn't meet the requirements, the company can't elect S-corp status. However, if you're a U.S. citizen or resident and the only owner, you'll qualify without a problem.
Making the S-Corp Election
Once you have registered with the Delaware Department of State, you have to file Form 2553 with the IRS to make the S-corp election. On the form, you have to specify the name of the corporation as well as the tax year the corporation will use. In addition, you have to include the name, Social Security number, ownership percentage and signature of each owner of the S-corp because the decision to be taxed as an S-corp must be unanimous.
Read More: When Can I Revoke an Election in an S Corporation?
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