Delaware Corporate Law structure allows for the formation of three different types of for-profit corporations: General Corporation, Close Corporation and Public Benefit Corporation (called a Benefit Corporation in the other states in which it is a legal entity).
Although there are three different classifications of for-profit corporations, the Internal Revenue Service only uses two different options for each of these corporations for tax purposes. Where the IRS is concerned, a corporation must be classified either as an S corporation or a C Corporation.
After a Certificate of Incorporation is filed with the state of Delaware Division of Corporations to officially create the new entity, the next step is to obtain a Federal Tax Identification Number, also referred to as an EIN. This is when you will choose whether you’d like the corporation to be taxed as a Subchapter S corporation or a C corporation.
There are advantages and disadvantages to each of these IRS classifications. The IRS will tax all corporations as C corporations unless the IRS is notified that the corporation would like to elect Subchapter S corporation tax status. In other words, C corporation tax status is the default status.
The C corporation taxation method is attractive for many reasons, and is something that larger companies, having shown profit over the course of two or more years, may prefer. Companies often take advantage of this method of taxation if they are looking to attract outside investors, but this taxation status is not generally advantageous for many startups.
The Subchapter S tax status, also known as an S corporation or an S-Corp, is a very popular tax status for small newly formed corporations. The Subchapter S of the tax code was first enacted in 1958, and has been used by countless number of entrepreneurs with great success.
Subchapter S tax status allows for a unique taxation method whereby the tax liability for the profits and losses flow through the company to the shareholders in their prorata share. The shareholders are then responsible for the taxes at their personal tax rate. This pass-through rule eliminates the double taxation issue related to the C corporation.
This type of taxation can be very beneficial for startup companies that need to pass along early losses to the shareholder; however, there are restrictions on which companies can take advantage of the Subchapter S tax status.
After the corporation has been formed and the EIN obtained, complete IRS Form 2553 in full, have all the shareholders sign it and send it to the IRS. The IRS must receive the form within two months and 15 days from the date of the company’s formation in order for the corporation to qualify for Subchapter S election.
If the corporation's principal business office is located in Connecticut, Delaware, District of Columbia, Florida, Georgia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia or Wisconsin, fax the form to (855) 270-4081 or mail it to Department of the Treasury Internal Revenue Service Center, Cincinnati, OH 45999.
If the corporation's principal business office is located in Alabama, Alaska, Arizona, Arkansas, California, Colorado, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington or Wyoming, fax the form to (855) 214-7520 or mail to Department of the Treasury Internal Revenue Service Center, Ogden, UT 84201.
Faxing the application to the IRS is the least reliable way to go about informing the IRS of the election, as many faxes wind up illegible and others are never even received. We recommend that you send your signed application via the United States Postal Service Certified Mail with Return Receipt.
The IRS estimates for the time it takes to complete and file Form 2553 include:
If you’d rather have an experienced formation expert file your Subchapter S tax election, we can help. One of our services includes the preparation of IRS Form 2553. You can rely on our service to ensure the form is completed accurately and will be ready to be signed by all your shareholders and then sent to the IRS.
Feel free to reach out to one of our business formation specialists with any questions about filing for Subchapter S tax status with the IRS. We are happy to help.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.
There are 2 comments left for Filing S-Corp Status on a New Delaware CorporationParviz Kazi said: Friday, December 8, 2017
If I have a Delaware LLC and I am doing business in New York, Can I file Form CT-6 to be treated as a New York S Corporation?HBS Staff replied: Monday, December 11, 2017
Unfortunately, this question is outside the realm of our experience forming Delaware companies. We suggest you contact an accountant in order to best answer your query. Thanks for reading our blog.David Whitehurst said: Tuesday, July 18, 2017
Please assist me with questions on receiving S-Corporation status as I am not certain whether the corporation has C or S status with the IRS. However, I have completed the taxes with the IRS as an S-Corporation. Our Corp name is Faith Christian Center, Inc.HBS Staff replied: Thursday, July 20, 2017
It would be best for you to inquire with your tax professional or the IRS to find out if your entity has S corporation tax status. You can reach the IRS at 1-800-829-4933.