Tax
Delaware LLC federal vs state tax: why most non-residents owe no state income tax
Confusion is common: Delaware franchise tax is not income tax. Most non-resident-owned LLCs owe no state income tax in Delaware or elsewhere.
Franchise tax is not income tax
Delaware franchise tax is a flat annual fee for the privilege of maintaining a Delaware LLC. It is $300 per year regardless of income, revenue, or activity. A Delaware LLC with $0 revenue and a Delaware LLC with $10M revenue both owe $300.
Income tax is calculated as a percentage of taxable income. Delaware does have income tax for entities engaged in business in Delaware, but a Delaware LLC with no Delaware customers, no Delaware employees, and no Delaware activity has no Delaware income-tax obligation.
Why most non-resident LLCs face no state income tax anywhere
State income tax nexus typically requires either physical presence (employees, office, warehouse) or substantial sales in the state. Non-resident-owned bootstrap LLCs with no US physical presence and no US-customer concentration generally have nexus in no state.
Amazon FBA changes this analysis: FBA inventory in fulfillment warehouses creates physical-presence nexus in those states. Discussed in the FBA-specific posts.
When state income tax might apply
California: $800 annual minimum LLC tax if the LLC is doing business in California (any California-source revenue, California customers, or California employees). New York: substantial filer obligations for LLCs with NY nexus. Texas: franchise tax for LLCs with Texas nexus (above thresholds). Massachusetts: corporate excise tax for LLCs with MA nexus.
Check nexus state-by-state using our /tools/sales-tax-nexus-checker/ tool. State income-tax nexus generally parallels sales-tax nexus but is not identical.
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