Single-owner Delaware LLC questions

Forum|Forum|1 year ago
November 13, 2024
2 replies
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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!

Ask the Experts - Biz Tax Moves - Nov 2024

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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jdj20912Author

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

Employee

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.

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Terri Lynn 11

Hello, jdj20912!

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
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.
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.
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:

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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Terri Lynn

jdj20912Author

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.