How to Incorporate an S Corp. in Delaware

By Tom Speranza, J.D.

How to Incorporate an S Corp. in Delaware

By Tom Speranza, J.D.

A business can form as a corporation in any U.S. state in accordance with that state's law. An S corporation is a federal law concept that allows an existing domestic corporation to be taxed as a partnership by filing an Election by a Small Business Corporation (Form 2553) with the U.S. Internal Revenue Service (IRS). An S corp. election enables the corporation to avoid paying federal income tax as a separate entity and pass-through its income, losses, credits, and deductions to its stockholders. The S corp's stockholders report the information on their individual tax returns.

Road sign saying welcome to Delaware

To establish an S corporation in Delaware, you need to first form a Delaware corporation that is eligible to file an S corp. election.

1. Choose a name.

To avoid confusion, Delaware requires its corporations to have relatively unique names. Because some of your potential names may already be in use by existing entities, you should create a list of three to five possible names for your company. In Delaware, a corporation must include one of these words (or their abbreviations) in its name: "association," "company," "corporation," "club," "foundation," "fund," "incorporated," "institute," "society," "union," "syndicate," or "limited."

You can search Delaware's entity database at the Department of State's website. For a fee, you can reserve a corporation name for up to 120 days prior to forming your entity.

2. Engage a registered agent.

Each Delaware corporation must have a registered agent located in the state to provide the state government (including its tax authorities) and private citizens and companies a permanent, reliable location for sending mail and legal documents to the corporation.

If your corporation will have a physical business location in Delaware where employees will work, the new entity can appoint itself to act as its own registered agent, but many corporations use the services of a reputable third-party company that specializes in serving as a registered agent.

3. Draft and file a certificate of incorporation.

Delaware corporations form by filing a certificate of incorporation with the Secretary of State together with a cover memo (Form Certification Memo) and paying the required filing fee. Although the Department of State provides sample incorporation forms on its website, federal law requires specific language in an S corporation's certificate of incorporation.

Because of the legal technicalities surrounding S corporations, hiring an experienced corporate lawyer to draft your company's formation documents can be a wise investment.

4. Issue the corporation's stock.

In exchange for paying capital contributions, the newly formed corporation issues stock to its stockholders in the form of stock certificates. The corporation's secretary records the issuance of stock in a stock transfer ledger and includes the following information:

  • Date of issuance
  • Stockholder name
  • Number of issued shares
  • Purchase price per share and total purchase price
  • Capital contribution (if different from the purchase price)
  • Stock certificate numbers

S corporations must comply with the strict limitations on their capital structure and the nature of their shareholders imposed by federal law. Any proposed stock issuance must avoid violating any of the following rules:

  • The corporation can't have more than 100 shareholders, but spouses, certain family members, and their estates sometimes qualify as a single shareholder for purposes of this limit.
  • All shareholders must be individuals, estates, certain kinds of trusts, or entities that are exempt from federal income tax under Sections 401(a) or 501(c)(3) of the U.S. Tax Code.
  • No shareholder can be a nonresident alien.
  • The corporation can have just one class of stock, however there can be nonvoting shares if they are otherwise identical to the voting shares.

5. Complete the corporation's initial documentation.

The corporation must have the following legal documents in addition to the formation documents filed with the Secretary of State:

  • Bylaws—a document that spells out the rules for how the stockholders, directors, and officers manage the company
  • Initial resolutions of the stockholders electing directors to the board and adopting the bylaws
  • Initial resolutions of the directors appointing officers—president, treasurer, and secretary
  • A standard form of stock certificate

A corporate lawyer can draft these documents to fit your company's particular ownership, management structure, and business activities.

6. File Form 2553 with the IRS.

Once the corporation has formed and capitalized, it can file the Election by a Small Business Corporation (Form 2553) with the IRS, making the election to be taxed as a partnership, known as an S election. In addition to the information the corporation must provide on the form, each of the corporation's initial stockholders must sign the form.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.