The taxes an LLC has to deal with vary greatly depending on the state where the LLC was registered.
Delaware is one of the most popular states for forming an LLC because of its major tax advantages and the fact that it is one of the 5 states that offer anonymity. It's no surprise that more than 66% of the companies on the Fortune 500 list are incorporated in Delaware.
So let's look at which taxes LLCs in Delaware are subject to!
Disclaimer: Business taxation is complicated and has many variations. Consult a tax professional before forming a company in the United States. This information is general, and every company has its own particular circumstances.
Pass-Through Taxation
The first thing you should know when evaluating how LLCs are taxed in Delaware is that you will benefit from one of the main advantages of LLCs: tax transparency, or "Pass-Through Taxation".
This term means that the LLC will not pay taxes on its profits as an entity; instead, the income passes through to the company's owners, and they must pay taxes according to their personal tax situation in their country of tax residence.
Delaware tax election: LLC or Corp?
In Delaware, LLCs can choose to be taxed in several different ways:
Companies usually choose to be taxed as "Corporations" to reduce their tax burden. It's important to keep in mind that this election will not change the way your LLC operates, only the way it pays taxes.
Franchise Tax
Delaware LLCs do not have to file an annual report (unlike other states), but they do have to pay an Annual Franchise Tax of $300 every year.
This tax must be paid by every LLC formed in Delaware, regardless of income or business activity. It is a requirement to keep your LLC active and in compliance with the state.
Your Annual Franchise Tax must be paid online before June 1 of each year. If you don't pay it on time, you will be charged a $200 fine and a penalty of 1.5% interest for each month it is late.
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Sales Tax
This paragraph is short: there is no sales tax in Delaware.
If a company is registered in Delaware, even if it physically operates somewhere else, its customers don't have to pay sales tax.
Gross Receipts Tax
Although Delaware doesn't charge a sales tax, companies that carry out business activities in Delaware are taxed on their gross receipts. Gross receipts are essentially total revenue without any deductions.
Gross receipts are the total amount received from the sale of goods or services sold by the company. Gross receipts tax rates range from 0.1037% to 2.0736%, depending on your business activity. Here you can see the list of activities and their corresponding rates.
Employer taxes
If you have hired employees in Delaware, you will need to register for "Unemployment Insurance Tax".
In addition, companies that must pay "Employee Withholding Tax" do so by registering online with the Delaware Division of Revenue.
There are also "Self-Employment Taxes", which apply to the income that LLC owners usually earn. You must complete a "Schedule SE" form to calculate how much you owe. This does not apply to Delaware LLCs considered "Foreign Owned".
If your Delaware LLC is "Foreign Owned"
If your LLC is considered Foreign Owned, that is, if all of its members are not U.S. residents and are not physically located in the U.S., the Delaware LLC will only be taxed in the United States on U.S.-source income. This means that income from other countries will not be subject to U.S. tax rules.
A U.S. nonresident cannot own an S corporation in the United States; therefore, your Delaware company will necessarily be an LLC or a C corporation.
Keep in mind that corporations are generally taxed on their total income, including both U.S.-source and non-U.S.-source income.
Conclusion
If you choose the state of Delaware when you open your LLC in the United States, you will have to pay $300 in franchise tax annually, you will not have to pay sales taxes, and you may have to pay gross receipts taxes and employer taxes.
Every tax situation is unique, and planning your Delaware LLC's taxes is essential. That's why it is essential that you contact an accountant or tax advisor to support you on these matters.
Written by
Ignacio Navarro
Ignacio Navarro is a Certified Public Accountant, founder of Start Companies and a specialist in U.S. companies for entrepreneurs, freelancers and digital businesses in Latin America. With training in international taxation and studies at UCEMA, he advises non-resident clients on forming and maintaining LLCs, opening bank accounts, invoicing, accounting and taxes. His experience combines tax strategy, compliance and practical vision for operating in the U.S. in a simple, organized and professional way.
