Startup, no revenue, partners in multiple states, do we need to file a state tax return?

[mvanbergen]

Hi there,   We have 4 members to our Delaware incorporated LLC.  Two members reside in Illinois and two members in Utah.  We just started our business in 2020 and are currently developing a product.  We don't have any sales yet (haven't even started selling), so zero revenue and just some expenses for the first year.   We also don't have a physical location/office anywhere....we are working from our respective homes.

Do I need to worry about filing a state return for the organization?  I'm thinking not, but if so, then I wonder which state I would need to file it with (IL or Utah or both?).

Thanks in advance for your advice,

Matt

[MinhT1]

As your LLC is registered in Delaware, it has to file a Delaware state return (form 300).

[Rick19744 · Accepted solution]

Some comments:

• Based on your limited facts, you most likely do not have a 2020 filing requirement.  See the attached from the instructions to form 1065 (I am assuming that your multi-member LLC will be taxed as a partnership)

Who Must File Domestic Partnerships

Except as provided below, every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes.

• All expenses incurred will be capitalized as either organization costs or start-up costs.  These will be either deducted or amortized when your business begins.
• Since you don't have a product or sales, it is not possible to provide complete guidance on state filing requirements.
• At a minimum you need to look at the filing requirements for IL and UT.  Depending on where your sales fall, you will have at least a filing requirement in those two states.  The filings may vary depending on the treatment of reporting for nonresidents.
• Because the state sourcing requirements is a changing environment, moving from the old 3 factor apportionment factor to more of a single-factor apportionment, each state may be different.
• Once you get your product developed and have a plan, I strongly recommend you schedule a visit with a tax professional who understands multi-state tax.  It is critical that you get started going down the right path.  Trying to be penny wise and pound foolish is not a good strategy with the facts as presented at this time.  Penalties and interest for not filing in a particular state can be significant, along with any professional fees dealing with the respective state authority.

I don't believe you have a Delaware filing requirement based on the form 300 instructions.

A PARTNERSHIP RETURN MUST BE COMPLETED BY ANY BUSINESS TREATED AS A PARTNERSHIP FOR FEDERAL PURPOSES WHICH HAS ANY INCOME OR LOSS, REGARDLESS OF AMOUNT, DERIVED FROM OR CONNECTED WITH A DELAWARE SOURCE. IF THE PARTNERSHIP HAS NO DELAWARE SOURCED INCOME OR LOSS, NO RETURN IS REQUIRED TO BE FILED.

You may have a Delaware Secretary of State filing requirement but not a form 300 filing requirement.