- Main differences between a C-corp and an S-corp in Delaware
- C-corp and S-corp: the formation process
- Taxation regime
- Taxes for a C-corp
- Taxes for an S-corp
- Taxes for C-corporations and S-corporations in Delaware: an example
- Corporation ownership structure
- C-corp ownership structure
- S-corp ownership structure
- Advantages and disadvantages of C-corp and S-corp in Delaware
- Advantages and disadvantages of C-corporations
- Advantages and disadvantages of S-corporations
Corporate legislation in Delaware allows registering two types of corporations: a C-corp or an S-corp. Each form of incorporation has its own advantages and disadvantages. Below we discuss the differences between a C-corp and an S-corp hoping to help you choose the form of company ownership that suits your business goals.
Main differences between a C-corp and an S-corp in Delaware
The two types of corporations differ with regard to the methods of their formation, the taxation regime, and the requirements to the shareholders. If you are planning to start a business venture in Delaware, you should consider the weak and the strong points of each form of company ownership. The type of corporation that you choose to register will have a bearing on the amount of taxes that the company will have to pay as well as the opportunities to attract investments. Thus, each form of company ownership may turn out more or less efficient.
Key differences between a C-corp and an S-corp in Delaware
|Formation||By default||Form 2553 has to be completed|
|Taxation||Corporate income tax + dividend tax||See-through taxation; each corporation owner pays their own taxes|
|Number of shareholders||minimum 1||maximum 100|
|Requirements to shareholders||No requirements||Only citizens of the USA or legal residents there|
|Types of shares||Several share types are allowed||Only one type of shares can be issued|
|Investment attraction opportunities||Best form of company ownership to attract investors||Hardly ever used to attract investors|
C-corp and S-corp: the formation process
This is the first difference between a C-corp and an S-corp that you will encounter in Delaware. A C-corp can be set up ‘by default’, which means that all you have to do is submit the Memorandum and Articles of Association to the state secretary and your company will be registered.
Forming an S-corp is a bit more difficult. In addition to submitting the Memorandum and Articles of Association, you will have to complete Form 2553 that will make the S-corp registered for federal tax purposes. Besides, the state authorities may request some additional documents for state tax purposes.
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The two forms of company ownership will also differ with regard to the taxation environment that they will operate in. An S-corp will let you save on taxes but this form of company ownership is unavailable to foreigners in the USA. This means that you would have to involve citizens or legal residents of the country in forming an S-corp in Delaware.
Taxes for a C-corp
The owners of a C-corporation have to pay the taxes twice: first, they pay the corporate income tax, and then they pay the dividend tax as well. There are two methods of avoiding the double fiscal burden: one is to make a loss by the end of the year and two is to reinvest the profit.
Salaries including the salaries paid to the corporation owners are deductible, which can help reduce the fiscal burden. At the same time, the IRS can qualify exorbitant salaries as dividends and then the tax consequences will follow.
The US tax legislation sets the corporate income tax rate for C-corporations at 21% regardless of the size of the income. An additional 8.7% is due to the state budget of Delaware. The dividend tax is levied in accordance with the double taxation avoidance agreement and the US tax legislation if (some of) the C-corp owners are foreign nationals.
Taxes for an S-corp
A S-corp is subject to different taxes in Delaware. This type of company ownership implies see-through taxation. This means that the owners of an S-corp include their corporate profits in their personal tax returns (Form 1120S) thus paying the income tax. In other words, the owners of an S-corp pay the taxes only once. In addition to that, an S-corp owner can deduct up to 20% of the corporate profit from the taxable base. This tax reduction is available only until 2025.
For instance, if the owner of an S-corp has earned US $100,000, s/he has the right to pay taxes only on US $80,000. The tax reduction is available only to S-corporations with the annual income below US $163,300 (for an individual taxpayer) or with the income below US $326,600 (for married taxpayers filing joint tax returns). The threshold amounts can be different every year.
Companies working in such areas as consulting, medicine, and jurisprudence can be unable to use the tax deduction if they are making high profits.
Taxes for C-corporations and S-corporations in Delaware: an example
Let us assume that a C-corp made US $100,000 last year. It has to pay the corporate income tax of 21% that is US $21,000. If the rest of the profit qualifies as dividends, the dividend tax is also due. Normally, the tax is 15%, that is US $11,850. In total, US $32,850 is due in taxes.
If an S-corp makes a profit of the same amount, the company owner reporting his/ her income in the annual tax return will have to pay only 24% in taxes in total.
As you can see, forming an S-corp in Delaware is reasonable for optimizing your tax burden. However, a C-corp has some additional possibilities to save on taxes that an S-corp does not have. For example, a C-corp can deduct the donations to charity from the taxable base, which an S-corp cannot do. So there are some nuances that need to be taken into account when deciding which type of corporation you want to form in Delaware. For this reason, you will be well advised to see InternationalWealth experts’ advice.
Corporation ownership structure
The ownership structures of a C-corp and an S-corp in Delaware are also different. In this respect, forming a C-corporation would be preferable as this type of corporation is easier to expand and easier to sell as well.
C-corp ownership structure
The C-corp ownership structure is flexible: it can have any number of shareholders and issue different kinds of shares. This is the reason why venture funds and business angels prefer working with C-corporations in Delaware. This form of company ownership will let you issue common stock and preferred stock, which will allow differentiating between the owners. An S-corp does not have this possibility, unfortunately.
Another weighty advantage of a C-corp over an S-corp is the possibility to easily sell the company or set up a subsidiary company. Both physical and legal entities can act as the founders of a C-corp while oly natural persons can be the shareholders of an S-corp.
S-corp ownership structure
S-corporations in Delaware can have up to 100 shareholders but not more. The shareholders shall be citizens of the USA or legal foreign residents in the country. In addition to that, an S-corp can issue shares of one type only: whether common shares or preferred shares, which disallows differentiating between the owners. The latter circumstance makes it difficult to attract investors to the S-corp.
Advantages and disadvantages of C-corp and S-corp in Delaware
The form of company ownership that you should choose will depend on your business objectives and your nationality. Generally speaking, if you want to pay less in taxes, you should form an S-corp. If you want to attract investments, you should opt for a C-corp.
Advantages and disadvantages of C-corporations
- Simplicity of company registration;
- Some tax deductions are available (if the company provide some social benefits to its handicapped workers or covers the employee’s medical insurance, for example);
- Tax deductions for charity. The C-corp can donate up to 10% of its profit to charity and pay no taxes on this portion of the profit;
- Ease of attracting new investors;
- No restrictions on the number of shareholders.
- Double fiscal burden on the company owners;
- The C-corp owners cannot obtain personal tax deductions if the company makes losses.
Advantages and disadvantages of S-corporations
- See-through taxation;
- An opportunity to deduct up to 20% of the company profit from the taxable base;
- An opportunity to obtain tax reductions on personal income if the company makes losses.
- More complicated company formation procedure;
- Restrictions on the maximum number of shareholders;
- The company can issue shares of one type only;
- Closer monitoring on the part of the IRS.
Learn more about the business opportunities in different states of the USA
As you can see, each form of company ownership has its pluses and minuses. If you consider both sides of the matter, you will be able to make a balanced choice that will depend upon the business tasks that you would like to pursue. However, we do not recommend that you should try to register a corporation in Delaware without professional assistance. There are several factors that may affect the efficiency of your business company in the USA. InternationalWealth experts will be happy to answer your questions related to setting up a company in Delaware or some other state and give recommendations on the company ownership form. Please write to email@example.com, use the online chat or a messenger to contact us. We will reply ASAP!
Can a foreigner set up an S-corp in Delaware?
Only if the foreigner has a legal residence permit in the USA. Citizens of the country normally form S-corporations in Delaware.
What type of business will an S-corp suit?
It will suit a small-size business seeking to reduce the tax burden. At the same time, you have to bear in mind that this form of company ownership is unattractive for investors.
What type of business will a C-corp suit?
Setting up a C-corp in Delaware would be a good idea if you hope to attract investors to your business project. This form of company ownership allows issuing shares of different types and there are no restrictions as to the shareholders’ nationality.