Single-owner Delaware LLC questions

[jdj20912]

Maryland resident creating a one-person Delaware LLC, to be taxed as a corporation: 

- Really no DE state taxes for LLC? 

- Single owner must be W-2 employee?

- Would there be anything unusual in the reporting of state or federal taxes for the single owner / employee of the LLC? 

- Any other caveats or gotchas to be concerned about? 

- can you offer an opinion on the best strategy for managing payroll for the one owner / employee? 

Thanks! 

[FranklinF]

An LLC, Limited Liability Company, is a State Legal Entity, not a tax entity. 

A Single-Member LLC (SMLLC) is a disregarded Entity for tax purposes which would default to a Schedule C (Profit or Loss from Business) or Schedule F (Profit and Loss from Farming) as applicable.

Regardless of your TAX ENTITY: Sole Proprietor, Partnership, S-Corporation, C-Corporation, Trust or Estate, you may or may not have Income Tax Nexus and/or Sales Tax Nexus with several states, including Maryland.

Nexus may be determined by physical presence, substantial economic activity, sales volume, as determined by each individual state with whom you transact business.

One of the main reasons why companies incorporate in Delaware is the legal and liability protection of established corporate laws.

You will NOT issue a W-2 to yourself. However, you MUST issue W-2's to your employees and 1099's to your contractors. In addition, there are many Bookkeeping and Payroll Software and Services you may choose from, QuickBooks being one of the most popular.

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[jdj20912]

Thank you for your reply - however, I may not have been clear in asking my questions - for various reasons, I intend to file a form 8832 to have this single-member Delaware LLC taxed as a C corporation, and to take my personal income solely as a dividend, if possible - in light of that, could you revisit my questions? Thank you! 

[NateTheGrEAt]

Since you stated that the entity will be taxed as a C Corporation, then yes, if you are providing services to the corporation you must be paid reasonable compensation (i.e. wages) for the services. Here is an IRS article about the topic; check the first item under "Corporate Officers". 

Also, be aware that from a tax planning standpoint, wages paid to you are deductible by the corporation as an expense. Dividends are not deductible, so they would be subject to double taxation, first at the corporate level and then again on your personal tax return. 

[FranklinF]

As a C-Corporation, per IRS Regulations, Owner-Operators (actively involved members performing services) of a C Corporation MUST receive a W-2 (with the appropriate withholdings timely sent to the different taxing authorities involved) and THE COMPENSATION MUST BE REASONABLE. 

The IRS defines Reasonable Compensation as the value that would ordinarily be paid for like services by like enterprises under like circumstances. Reasonableness is determined based on all the facts and circumstances.

As a matter of fact, nowadays, Reasonable Compensation is a major focus of attention of the IRS in the Audit of Business tax Returns.

You may pay dividends or retained them as you choose but only after addressing the Reasonable Compensation issue.

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[Terri Lynn]

Hello, jdj20912!

1. Do I have to pay any Delaware state taxes as a LLC?
   Delaware LLCs that don't do business in Delaware are not required to pay income tax or file Delaware tax returns. However, they must pay a $300 annual franchise tax
2. Would there be anything unusual in the reporting of state or federal taxes for the single owner / employee of the LLC?                                                                                                                                                      As an employee of the company, you are required by the IRS to receive a salary and file a W-2 to report your wages so that employment taxes can be accurately determined and paid. You will then report this on your personal tax return as you would with any W-2 you received. 
3. Any  other caveats to be concerned about?                                                                                                               The biggest thing to be aware of in my opinion, is that you will have to file two tax returns, an individual 1040 and the 1120-S. Also, keep in mind you will now have an additional form, Schedule K-1, 1120-S. to issue from your S-Corp return and then report on your personal 1040. 

4. Can you offer an opinion on the best strategy for managing payroll for the one owner / employee? 

   For a business with only one owner and employee, using payroll software tailored for single-person companies can be the most efficient payroll strategy. This type of software can automatically handle calculations, support tax compliance, and reduce time spent on manual data entry. At the same time, it's still important for the business to keep accurate records and separate payroll money from general business funds. 

For more information please see: 

• S-Corp Taxes: An Introductory Guide
•  S-Corp Federal Tax Filing Dates 
• Quick-books Payroll 
• Filing Business Income Tax - Delaware Division of Revenue 
• LLC/LP/GP Franchise Tax Instructions 

Please feel free to reach back out with any additional questions or concerns you might have!

Have an amazing rest of your day!

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[jdj20912]

Thanks so much for your very informative reply! But please note that I am expecting to file form 8832 with the IRS to have this LLC taxed as a C corporation, not as an S corporation - does that change any of the answers that you gave me? Thanks again! 

[FranklinF]

Both C-Corporations and S-Corporations are subject to reasonable compensation guidelines/rules. The S-Corporation, however, is a Pass-Through-Entity, and as such, the income is taxed at the shareholder level. In other words, it is NOT subject to the Double Taxation as in the case of C-Corporations.

[Terri Lynn]

Thanks again, jdj20912!

In general, the information would be the same, other than the fact that as a C-corporation, you will be taxed as a completely separate tax entity. You will file a corporate tax return, form 1120 and pay taxes at the corporate level. You could potentially be subject to double taxation, if you elect to have any of your corporate income distributed to you in the form of dividends, as the business owner, in addition to the salary you pay yourself, and report on your W-2.

Here are some additional links you may find helpful:

• About Form 8832 
• Delaware Corporate Taxes 
• Choose How Your Business is Taxed: IRS Form 8832  

Please feel free to reach back out with any additional questions or concerns you might have!

Have an amazing rest of your day!

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