When incorporating a business in Delaware, one of the most important decisions you’ll need to make is whether to structure your company as a C Corporation (C Corp) or an S Corporation (S Corp). While both are legal entities offering limited liability protection, they differ significantly in taxation, ownership restrictions, stock issuance, and investor considerations. Understanding these differences can help you choose the right structure for your business.

1. Taxation: The Biggest Difference

C Corporation Taxation

A Delaware C Corporation is subject to double taxation:

• The corporation itself is taxed on its income at the federal corporate tax rate (currently 21%).
• If the company distributes dividends, shareholders must also pay taxes on them at their personal income tax rate.

This structure can result in a higher overall tax burden, but it allows for business profits to be reinvested at the corporate tax rate rather than at a potentially higher individual tax rate.

S Corporation Taxation

A Delaware S Corporation avoids double taxation by using a pass-through taxation model:

• The corporation does not pay federal corporate income tax.
• Profits and losses flow directly to shareholders, who report them on their individual tax returns.

This setup can lead to tax savings, especially for small businesses and closely held corporations. However, all profits are taxed regardless of whether they are distributed to shareholders.

2. Ownership Restrictions

C Corporation Ownership

• Can have unlimited shareholders.
• Can be owned by foreign investors, other corporations, LLCs, and partnerships.
• Suitable for businesses planning to attract institutional investors, private equity, or venture capital.

S Corporation Ownership

• Limited to 100 shareholders.
• All shareholders must be U.S. citizens or permanent residents.
• Cannot be owned by corporations, LLCs, or partnerships.
• Best for small, closely held businesses that want pass-through taxation.

3. Stock Issuance and Fundraising

C Corporation

• Can issue multiple classes of stock (e.g., common and preferred stock), allowing for flexible equity structures.
• This flexibility makes it attractive to venture capitalists and angel investors.

S Corporation

• Limited to one class of stock (though voting and non-voting shares are allowed).
• This restriction makes it harder to structure investments or attract investors.

4. Delaware Franchise Taxes and Filing Fees

Delaware imposes franchise taxes on both S Corps and C Corps. However, C Corporations generally pay higher franchise taxes, depending on their number of authorized shares.

• C Corporation Franchise Tax: Calculated based on either the number of shares authorized or total gross assets. Can range from $175 to $200,000 per year.
• S Corporation Franchise Tax: Typically a flat fee of $175 per year.

Both types of corporations must file an Annual Report with Delaware, and failure to do so can lead to penalties or loss of good standing.

5. Suitability for Investors and Funding

• C Corporations are the preferred choice for startups planning to raise capital through venture capital, IPOs, or stock options. Most institutional investors require a C Corporation structure due to its flexibility in stock issuance.
• S Corporations are better suited for small businesses, family-owned businesses, and professional service firms that do not need outside investors.

6. Compliance and Formalities

Both C Corps and S Corps must adhere to corporate formalities, including:

• Holding annual shareholder and director meetings.
• Keeping accurate corporate records.
• Maintaining bylaws and issuing stock certificates.
• Filing required state and federal tax documents.

Choosing the Right Business Structure

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Choose a C Corporation if:

• You plan to seek venture capital or go public.
• You want to issue multiple classes of stock.
• You anticipate significant reinvestment of profits and want to take advantage of corporate tax rates.
• You want no restrictions on ownership.

Choose an S Corporation if:

• You want pass-through taxation to avoid double taxation.
• You have a small number of U.S.-based shareholders.
• You don’t plan to issue multiple classes of stock.
• You are running a small business or professional services firm.

Conclusion

Both Delaware C Corporations and S Corporations offer significant advantages, but choosing the right structure depends on your business goals, tax considerations, and fundraising plans. If you plan to raise venture capital, scale aggressively, or go public, a C Corp is likely the best choice. If you are a small business looking to minimize taxes and simplify ownership, an S Corp is more appropriate.

Before making a decision, consult with a tax advisor or corporate attorney to ensure you choose the best structure for your business needs. And if you're still in the early stages, don’t forget to check out the Postly Business Name Generator to help you find the perfect name for your new venture.