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By The Wyoming LLC Attorney Team

Jun 03, 2022
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Delaware LLC Taxes

How to Start an LLC

Summary

This article explains how limited liability companies (LLCs) are taxed in Delaware, highlighting pass-through taxation for single and multi-owner LLCs. It also discusses the option for LLCs to elect taxation as a C corporation or S corporation for tax liability reduction.

Limited liability companies are a form of business entity. When forming an LLC, you will be provided limited liability protection for all the owners of your business. 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”.

How Are Limited Liability Companies Taxed in Delaware?

Pass-through taxation is the act of being taxed as either a partnership or sole proprietorship. Limited Liability Companies are not a separate tax entity 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.

Start an LLC in Delaware

Income Taxes

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.

Electing Taxation

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.

Bottom Line

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. For personalized tax assistance and guidance, we recommend consulting a tax attorney or accountant to ensure compliance and optimize your tax strategy.

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 paralegals are here to help. Feel free to complete the contact form or call +1 (307) 683-0983 to speak with our knowledgeable team.