Business taxation in Delaware

Over 60% of companies on the Fortune 500 list have chosen Delaware for their registration. Amazon, Google, Tesla—these are just the tip of the iceberg of companies that have selected this state as their home. When such giants choose, it’s not just a trend; it’s a choice driven by advantages and prospects.

And here, in the sea of opportunities, it’s worth stopping to ask: “Why Delaware?” A favorable tax environment, an efficient registration process, reliable confidentiality protection, and flexibility in many aspects—are just a few arguments that become significant when choosing a state to establish your IT project.

But today, we want to talk about the taxation of IT companies in Delaware.

Taxation of LLCs in Delaware

Taxation of LLCs in the state of Delaware is like choosing from a menu where you get to pick the ingredients for your dish. To make it easier for you to understand, here’s how it all works:

Typically, if you don’t make any specific choices, your LLC is automatically taxed as a partnership. This means that the company itself doesn’t pay taxes. Instead, the taxes pass through to you, the members of the LLC. Essentially, you pay taxes on the income generated through your company.

A bit of formality: each founder of the LLC must have their individual Taxpayer Identification Number (ITIN) for tax purposes. And, of course, you need to file declarations in accordance with state rules.

2024 federal personal income tax

The table includes the main types of taxes but is not limited to them, as taxation depends on the chosen type of company activity and may include additional taxes.

And here’s the nuance: your LLC can choose a tax structure similar to a C-Corporation. However, this is a bit more serious, requiring the completion of specific forms, such as IRS 8832.

So, taxation in Delaware is not just about complex numbers and forms; it’s also an opportunity to configure your business as you see fit, providing it with legal and financial flexibility.

Taxation of C-Corporations in Delaware

Regarding C-Corporations in the state of Delaware, the conversation becomes a bit more serious. This type of company pays its taxes independently, without sharing them with the owners. Let’s delve into this a bit:

Unlike an LLC, a C-Corporation is considered a separate legal entity. This means it pays taxes on both the federal and state levels. The federal tax rate is 21%, and in Delaware, it’s 8.7%.

But it’s not that straightforward. C-Corporations are taxed on their net income only, which is what remains after deducting all expenses.

For companies investing significant capital before turning a profit (such as tech startups), taxes may remain minimal or even non-existent if losses exceed profits.

As for foreign shareholders receiving dividends, they are required to file tax returns with the IRS.

Now, a bit of formality: every corporation must file its tax return (IRS Form 1120). This needs to be done by April 15 each year, with quarterly payments to the IRS due on the 15th of the 4th, 6th, 9th, and 12th months of the tax year.

And don’t forget another detail: if 25% of the C-Corporation is owned by a foreign entity, an additional form (5472) must be added to Form 1120 in accordance with sections 6038A and 6038C. Failure to file may result in a $25,000 penalty.

Franchise tax in Delaware

The franchise tax in Delaware is a unique cost associated with the privilege of having your company in the state. Let’s explore how it works.

This tax does not apply to all states, but Delaware has chosen to be among those that impose it. It applies to companies with Delaware LLC status as well as C-Corps.

For LLCs, it’s straightforward: a flat fee of $300 USD per year. Fair, convenient, with no unnecessary complications. On the other hand, C-Corps pay a fee that depends on the calculation method and the number of issued shares. It starts at $175 and increases based on the profits earned.

The payment deadline for C-Corps is no later than March 1, and for LLCs, it’s June 1.

Another detail: the tax is paid for the previous calendar year of business activity, regardless of whether the company had any income. Even if you decide to close your business midway through the year, you’ll still have to pay for the privilege of owning the franchise. A dissolved company remains liable for the full franchise tax for the year of its dissolution, regardless of when the cancellation occurred during that year.

If you need Delaware business consultations, feel free to contact Finevolution. Send a request through the form below or a message on Telegram bot/Viber, WhatsApp chat, for consultations. Our working hours are 9:00-19:00 from Monday to Friday.