How Delaware Taxes LLCs in 2025
Delaware is the most popular state in America for LLC formation, with over 1.8 million business entities registered there. Its reputation as a business-friendly jurisdiction is well-earned, thanks to the Court of Chancery, flexible LLC laws, and favorable tax treatment for out-of-state businesses. However, the tax picture for LLCs operating in Delaware is more nuanced than many realize.
Delaware imposes graduated personal income tax rates from 2.2% to 6.6% on residents' income, including LLC pass-through income. However, Delaware does not tax income earned outside the state by non-resident LLC members. This is a key reason why many businesses form in Delaware: if you form a Delaware LLC but operate elsewhere, you may owe no Delaware income tax.
Key Distinction: Delaware LLCs that do NOT do business in Delaware and have no Delaware-source income pay only the $300 annual franchise tax. They owe no Delaware income tax. LLCs that operate in Delaware pay the $300 franchise tax PLUS Delaware income tax on their members' shares.
Delaware Income Tax Brackets (2025)
For LLC members who are Delaware residents or who have Delaware-source income:
| Taxable Income | Tax Rate |
|---|---|
| $0 - $2,000 | 0% |
| $2,001 - $5,000 | 2.2% |
| $5,001 - $10,000 | 3.9% |
| $10,001 - $20,000 | 4.8% |
| $20,001 - $25,000 | 5.2% |
| $25,001 - $60,000 | 5.55% |
| Over $60,000 | 6.6% |
Delaware's standard deduction is $3,250 for single filers and $6,500 for married filing jointly. The state also offers personal credits of $110 per person and $110 per dependent.
Delaware $300 Annual Franchise Tax
All Delaware LLCs, regardless of whether they do business in the state, must pay the $300 annual franchise tax:
- Amount: $300 per year (flat fee for LLCs)
- Due date: June 1 annually
- Late penalty: $200 penalty plus 1.5% per month interest on the unpaid amount
- Filing: Paid to the Delaware Division of Corporations
- Applies to all LLCs: Domestic and foreign LLCs registered in Delaware
- Failure consequences: LLC may be voided or have its certificate of formation cancelled
Why Companies Form LLCs in Delaware
Despite the $300 annual franchise tax, Delaware remains the preferred state for LLC formation for several reasons:
- Court of Chancery: Delaware's specialized business court handles disputes quickly and efficiently, with expert judges (no juries) who understand complex business law
- Flexible LLC Act: The Delaware Limited Liability Company Act is one of the most flexible in the nation, allowing extensive customization of operating agreements
- Privacy: Delaware does not require member or manager names in formation documents
- No income tax on out-of-state operations: If your LLC operates outside Delaware, you pay no Delaware income tax
- Series LLCs: Delaware allows Series LLCs, which can create separate liability shields within a single LLC
- Well-developed case law: Decades of LLC-related court decisions provide clarity and predictability
Reality Check: Forming a Delaware LLC when you operate in another state means you likely need to register as a foreign LLC in your operating state and pay THAT state's taxes. You end up paying both the $300 Delaware franchise tax AND your operating state's fees and taxes. Delaware formation mainly benefits larger companies seeking legal advantages.
Federal Taxes for Delaware LLCs
- Self-Employment Tax: 15.3% (12.4% Social Security on income up to $176,100 and 2.9% Medicare on all income, plus 0.9% Additional Medicare Tax on high earners)
- Federal Income Tax: 10% to 37% based on filing status and total taxable income
- QBI Deduction: Up to 20% of qualified business income under Section 199A
Delaware Sales Tax
One of Delaware's biggest advantages is the complete absence of sales tax:
- State sales tax: 0% (no sales tax whatsoever)
- Local sales tax: None (no local jurisdictions impose sales tax)
- Gross receipts tax: Delaware instead imposes a gross receipts tax on businesses at rates from 0.0945% to 2.0736% depending on business type
The gross receipts tax is levied on the seller's total gross revenues. While there is no sales tax passed to consumers, the gross receipts tax is a cost of doing business in Delaware. Rates vary by business category, with retailers paying around 0.7468% and manufacturers paying as low as 0.0945%.
Delaware LLC Formation Costs
- Certificate of Formation: $90
- Annual franchise tax: $300
- Registered Agent: Required; Delaware residents or commercial agents ($50-$300/year)
- Business license: Required for businesses operating in Delaware (varies by municipality)
- Foreign LLC registration (if applicable): Varies by state where you actually operate
Delaware Pass-Through Entity Tax
Delaware has enacted a voluntary Pass-Through Entity Tax election:
- The tax rate is 6.6% on distributable income
- Members receive a corresponding credit on their individual Delaware returns
- The election is made annually
- Serves as a workaround for the federal $10,000 SALT deduction cap
- Only beneficial for members who are Delaware residents or have Delaware-source income
Delaware Employment Taxes
- Unemployment Insurance: 0.3% to 8.2% on the first $10,500 of wages per employee (new employer rate: varies by industry, typically 1.8%)
- Workers' Compensation: Required for most employers
- Disability Insurance: Delaware does not have a state disability insurance program
Delaware LLC vs. Other Popular Formation States
| State | Top Income Rate | Annual Fee | Filing Fee | Special Features |
|---|---|---|---|---|
| Delaware | 6.6% | $300 | $90 | Court of Chancery, Series LLC |
| Wyoming | 0% | $60 | $100 | No income tax, low fees |
| Nevada | 0% | $350 | $425 | No income tax, privacy |
| New Mexico | 5.9% | $0 | $50 | Low formation cost |
| Florida | 0% | $138.75 | $125 | No personal income tax |
Filing Deadlines for Delaware LLCs
- Individual return (Form 200-01): April 30 (Delaware has a later deadline than most states)
- Partnership return (Form 300): April 30 for multi-member LLCs
- Annual franchise tax: June 1
- Extension: Automatic extension to October 15 with Form 1027
- Estimated tax payments: April 30, June 15, September 15, January 15
Common Mistakes with Delaware LLCs
- Forming in Delaware when you operate elsewhere: You will pay Delaware's $300 franchise tax PLUS your operating state's fees and taxes. This is only worthwhile for companies seeking Delaware's legal protections.
- Missing the June 1 franchise tax deadline: The $200 late penalty and 1.5% monthly interest add up quickly.
- Forgetting the gross receipts tax: If operating in Delaware, you owe gross receipts tax on your business revenue, even though there is no sales tax.
- Assuming Delaware formation provides tax savings: Delaware's advantages are primarily legal, not tax-related. You still owe taxes where you physically operate.
- Not maintaining a registered agent: Delaware requires a registered agent with a Delaware physical address.
Tax Planning for Delaware LLC Owners
- Evaluate formation vs. operation state: If you operate in Delaware, plan for both income tax and gross receipts tax
- Consider the PET election: If you have Delaware-source income and are affected by the SALT cap, the PET election can provide federal savings
- Maximize federal deductions: QBI deduction, retirement contributions, health insurance premiums
- Track gross receipts: Understand which category your business falls into for the gross receipts tax
- Consider Series LLC structure: If you have multiple business lines, a Series LLC can provide separate liability protection within one entity