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A Delaware S corporation is a corporation that, in general, doesn't pay federal income taxes.
Once the IRS approves your application, your corporation will not have to pay U.S. federal income taxes. Instead, the tax liability (or tax credit) will be passed through to the individual shareholders according to their ownership share of the Delaware S corporation.
One of the disadvantages of general and close corporations is that the profits on these types of corporations can be taxed twice—once at the corporate level by way of a corporate income tax and again at the individual shareholder level if a dividend is declared.
A Delaware S corporation is either a general corporation or a close corporation that has elected to be taxed pursuant to Subchapter S of the IRS code.
The election of Subchapter S tax status allows the profits of the corporation to pass through the entity to the individual shareholders and, accordingly, is only taxed once. Thus one of the benefits of a Delaware S corporation is that it has all of the benefits of a Delaware corporation but with a different tax status.
Subchapter S tax status is reserved for small business corporations and refers only to a company's federal taxation. In some states, it may be necessary for the corporation to file IRS Form 2553 in order to be treated as an S corporation for state income tax purposes.
If you don't submit Form 2553, your corporation will be a C corporation. One of the disadvantages of a C corporation is that the profits are taxed twice if and when shareholders receive a dividend.
Here's a quick reference for the requirements of having S-Corp status for your corporation, along with the advantages and disadvantages.
The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, startups and general business topics.
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