Delaware LLC Taxes

Limited liability companies are a form of business entity that offer various benefits, including asset protection. When considering forming an LLC, it's essential to understand the associated costs, requirements, such as filing an annual report, and taxes. Although not mandatory, an essential document to consider during formation is the operating agreement, which outlines ownership and operating procedures. Choices for LLC structures include single member LLCs, Multi-Member LLCs, and for those seeking anonymity, an anonymous LLC may be an option. Owners are called members of an LLC and will be taxed at their personal tax rates.

One advantage to forming an LLC is in regard to income taxes. LLCs are able to elect taxation based on their personal preference, and the number of members that form the organization. What is important to note is that the IRS does not recognize LLCs for tax purposes. This is because an LLC is not a separate tax entity, instead, it benefits from “pass-through taxation”.

Pass-through taxation is the act of being taxed as either a partnership or sole proprietorship. Limited Liability Companies are not separate tax entities like a corporation. This means that all profits will flow through the LLC and pass on to the members, who will then be taxed according to their individual tax rate.

Single Owner LLCs

The IRS treats one-member LLCs in the same way as sole proprietorships. This means that for tax purposes, a single-member LLC will not pay taxes. Instead of filing a return with the IRS, the member/owner of the LLC pays taxes through their personal tax return.

Multi-Owner LLCs

Co-owned LLCs are taxed as partnerships by the IRS. Similar to a single-member LLC, multi-owner LLCs do not pay taxes on business income. Co-owners of an LLC will each be required to pay taxes on their share of the profits, within their personal income tax returns. This is done with a Schedule E attached.

Steps to report income from a multi-owner LLC are as follows:

1. The partnership files an information return with the IRS using Form 1065.
2. You receive a Schedule K-1 for each partner. This shows your share of the profit or loss in the partnership.
3. Transfer Schedule K-1 information to Schedule E. The Schedule K-1 form will break down your income into different types. Each type of income goes in a specific place on Schedule E.
4. Include the income from your Schedule E in the right place on your Form 1040 or 1040-SR.

LLCs are able to elect taxation in a few different forms. Aside from being taxed as a sole proprietor or partnership, LLCs can also choose to be taxed as a C corporation or S corporation.

Typically businesses will elect to be taxed as a corporation in order to reduce tax liability. This is often a choice made by high-income individuals. It is good to note that this election will not change how your LLC operates, but only the way you will pay taxes.

Understanding the taxation of limited liability companies in Delaware is essential for business owners. Delaware offers pass-through taxation for both single and multi-owner LLCs. Additionally, the option to elect taxation as a C corporation or S corporation can provide tax liability reduction strategies.

If you're considering forming a Delaware LLC or need assistance with the process, don't hesitate to reach out. Form your Delaware LLC today, and our experienced Business Success Advisors are here to help. Feel free to complete the contact form or call +1 (307) 683-0983 to speak with our knowledgeable team.