Delaware S Corporation
Generally, a corporation is a legal entity that is separate and distinct from its owners. All corporations enjoy most of the rights and responsibilities that an individual possesses: a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.
A Delaware S Corporation is a small business corporation that is treated for federal tax purposes as a partnership called also subchapter S corporation or simply S corp.
Immediately after incorporation, a corporation is known as a C class one. This means it is a subject for double taxation which may create problems for your business model. Basically, an S corporation is a form of corporation that meets the IRS requirements for, and has made a proper election to be taxed under, Subchapter S of the Internal Revenue Code. This gives a corporation with 75 or fewer shareholders the benefit of incorporation while being taxed as a partnership.
This means that any profits earned by the corporation are not taxed at the corporate level but only in the hands of the shareholders. This can prove a huge benefit for a corporation. The corporation can pass income directly to shareholders and avoid double taxation that is inherent with the dividends of public companies, while still enjoying advantages of the corporate structure.
However, in order to qualify, a corporation must be a small business corporation. This involves several restrictions and requirements.
- Must be a domestic corporation
- Must not have more than 75 shareholders
- Must include only eligible shareholders
- Must have only one class of stock
Therefore, election for taxation under the terms of the Subchapter S is not allowed for corporations owned by US aliens. The first requirement forbids, domestic corporation meaning that it must be owned by US residents.
Some people think that they could first incorporate a C Corp and then another one being owned by the first, which is an US legal entity and later elect for S taxation of IRS. Again, this is not possible as it is against the third requirement; corporation shareholders are not eligible.
The reason why S corporations are not available for aliens is that if election for S taxation would be available neither the corporation neither the shareholders would be taxable. In conclusion this taxation feature for IRS is meant to avoid double taxation, not to avoid taxation at all. If you are an overseas citizen, probably a Limited Liability Corporation would be the next choice.
