Most states tax at least some types of business income derived from the state. As a rule, the details of how income from a specific business is taxed depend in part on the business's legal form. In most states, corporations are subject to a corporate income tax, while income from pass-through entities such as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships is subject to a state's tax on personal income. Tax rates for both corporate income and personal income vary widely among states. Corporate rates, which most often are flat regardless of the amount of income, generally range from roughly 4% to 10%. Personal rates, which generally vary depending on the amount of income, can range from 0% (for small amounts of taxable income) to around 9% or more in some states.
Currently, six states—Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming—don't have a corporate income tax. However, four of those states—Nevada, Ohio, Texas, and Washington—do have some form of gross receipts tax on corporations. Moreover, five of those states—Nevada, South Dakota, Texas, Washington, and Wyoming—as well as Alaska, Florida, and Tennessee currently have no personal income tax. Individuals in New Hampshire are only taxed on interest and dividend income.
Apart from taxing business income through a corporate income tax or a personal income tax, many states impose a separate tax on at least some businesses, sometimes called a "franchise tax" or "privilege tax." This is frequently justified as a tax simply for the privilege of doing business in the state. As with state taxes on business income, the specifics of a state's franchise tax often depend in part on the legal form of the business. Franchise taxes are generally either a flat fee or an amount based on a business's net worth.
Delaware has a franchise tax and a corporation income tax, as well as a tax on limited liability companies, limited partnerships, and general partnerships. Your business might be subject to one or more of these taxes, depending on its legal form. Additionally, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.
Delaware's franchise tax, which is essentially a tax on the privilege of having a Delaware business, applies to traditional corporations (C corporations) and S corporations. Delaware provides two different methods for calculating the franchise tax: the "authorized shares method" and the "assumed par value capital method." You should use the method that results in the lowest tax. Delaware has a calculator you can download to calculate this tax.
Your corporation pays a flat fee that varies depending on the number of authorized shares, as follows:
The tax rate using this method is $400 per $1,000,000 (or part thereof) of the assumed par value capital of the corporation. The minimum tax is $400. To use this method, you must provide figures for all issued shares and total gross assets as reported on the corporation's federal tax return (IRS Form 1120, Schedule L).
Delaware corporation income tax is assessed at a flat 8.7% of taxable income derived from Delaware. (By comparison, the state's personal income tax rate varies from zero for nominal personal income to the highest rate of 6.6%.)
Delaware LLCs, limited partnerships, and general partnerships are required to pay an annual tax of $300.
Here's a brief look at additional details for five of the most common forms of Delaware business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Delaware corporations are subject both to the state's franchise tax and its corporation income tax.
An S corporation is created by first forming a traditional corporation and then filing a special form with the IRS to elect "S" status. Unlike a traditional corporation, an S corporation generally is not subject to separate federal income tax. Rather, taxable income from an S corporation is passed through to the individual shareholders, and each shareholder is subject to federal tax on their share of that income. In other words, S corporations are pass-through entities. (Note that a shareholder's share of the S corporation's income need not actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.) Delaware recognizes the federal S election and does not require Delaware S corporations to pay income tax. However, it does require these businesses to the state's franchise tax. In addition, an individual S corporation shareholder will owe tax to the state on their share of the company's income.
Like S corporations, standard Delaware LLCs are pass-through entities and are not required to pay federal or state income tax. LLCs are, however, required to pay a flat annual tax of $300 to the state. This annual tax aside, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amounts distributed to them.
Note that while, by default, LLCs are classified for tax purposes as partnerships (or, for single-member LLCs, disregarded entities), it is possible to elect to have your LLC classified as a corporation. In that case, the LLC would also be subject to Delaware's corporate income tax.
General partnerships and limited partnerships are required to pay a flat annual tax of $300 to the state. However, this annual tax aside, income from partnerships is distributed to the individual partners, who then pay tax on the amount distributed to them on both their federal and state tax returns.
Income from your business will be distributed to you as the sole proprietor, and you will pay tax to the state on that income.
The primary focus here is on businesses operating solely in Delaware. But if you're doing business in several states, you should be aware that your business might be considered to have nexus with those states and, therefore, might be obligated to pay taxes in those states. Also, if your business was formed or is located in another state but generates income in Delaware, it might be subject to Delaware taxes. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated. If you run such a business, consult with a tax professional.
For further guidance on Delaware's franchise tax, corporation income tax, and tax on LLCs, general partnerships, and limited partnerships, check the Division of Corporations website. For information on business-related taxes in other states, check Nolo's 50-State Guide to Business Income Tax. And, if you're looking for detailed guidance on federal income tax issues, check Tax Savvy for Small Business by Frederick Daily.
Updated February 8, 2022