Is double taxation “fair” to corporations and shareholders?

Are S-corporations subject to taxation in the state they are incorporated in if none of their shareholders live in that state?

• If I have a Delaware S-corporation and the shareholders in are different states, does the S-corporation pay Delaware state tax or is the income of the corporation "pass through" to the share holders and taxed at the state personal tax rate for the states they are located in?

• Answer:

  Are you doing business in Delaware? Delaware recognizes the federal S corporation election, and as such, the entity isn't subject to tax on the corporate level.  If no revenue is generated from sources in Delaware, then you need not file an annual income tax return.  If you are doing business in delaware (by obtaining revenue from sources in delaware or income from property located in delaware) and since the income passes through to each individual shareholder, Delaware requires that the S corporation pay taxes on behalf of its non-resident shareholders.  The tax is based on income from sources in Delaware that is allocated to all non-resident shareholders.  The tax is also paid at the highest personal income tax rate, which is currently 6.95% - it was 5.95% prior to December 31, 2009.  Each non-resident that receives delaware sourced income may also have to file a return.  It's important to note that even if each shareholder files a personal income tax return and pays the tax themselves, Delaware will still impose the tax on the S corporation.  The good is that because the S corporation is required to pay the tax, if the non-resident shareholder is required to file a personal income tax return, they do get a credit for the tax paid by the S corporation on their behalf.  The  S corporation is only required to pay tax on behalf of its non-residents.  This is most likely because resident shareholders have to file and pay the tax on their personal income tax return. Also (You didn't think that was it, did you?) Delaware imposes an annual stock-based franchise tax on all domestic corporations - for the privilege of doing business in their lovely state.  The tax is ranges from $35 - $165,000 annually.  If you owe more than $5,000 Delaware will require you to make estimated payments. The franchise tax return is due March 1. I'm not sure how you're organized (LLC with an S Corporation election or C corporation with an S corporation election), but just in case you're organized as an LLC, I should note that Delaware imposes an annual LLC or business entity tax on all LLCs.  The tax is a flat fee of $250, and payment of which is due June 1.  Yep, that's 3 days from now. One more thing... even though you may be organized in Delaware, if you're generating revenue and/or residing in another state, then you will more than likely will have nexus in those states and will be required to file and pay income taxes. Whew, OK.  I'm done.  That's probably the longest answer I've ever written on Quora.  Good luck!