Q.  What is a Limited Liability Company (LLC)?

A.  A limited liability company (LLC) combines certain characteristics of both a corporation and also a partnership or sole proprietorship (depending on how many owners there are).

Members of a limited liability company are given the same advantage of “limited liability” as shareholders in a corporation, but are generally taxed only at the member level like a partner in a partnership. LLC members are the owners of the LLC as much as shareholders are the owners of a corporation or partners are the owners of a partnership.
Q.  How does Delaware classify a Limited Liability Company for income tax purposes?

A.  A Limited Liability Company doing business in Delaware is classified as a partnership for Delaware income tax purposes, unless it has otherwise been classified for federal income tax purposes.

A LLC is always classified in the same manner for Delaware income tax as it is for federal income tax purposes.

Limited Liability Companies classified as partnerships must file Delaware Form PRT-RTN.

Limited Liability Companies classified as corporations must file either Delaware Form CIT-TAX or Form SCT-RTN.
Q.  What is a single-member Limited Liability Company (LLC)?

A.   A single-member LLC can be either a corporation or a single-member “disregarded entity.” To be treated as a corporation, the single-member LLC has to file IRS Form 8832 and elect to be classified as a corporation. A single-member LLC that does not elect to be treated as a corporation will be classified as a “disregarded entity,” which is taxed as a sole proprietorship for income tax purposes.

Q.  What type of return should a single-member LLC “disregarded entity” file with Delaware?

A.  Delaware treats a single-member “disregarded entity” as a sole proprietorship for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the State of Delaware.

As the sole member of your LLC, you must report all profits (or losses) of the LLC on Schedule C and submit it with your Delaware personal income tax return (Form PIT-RES). Even if you leave profits in the company’s bank account at the end of the year – for instance, to cover future expenses or expand the business – you must pay income tax on that money.

Q.  What is a multi-member Limited Liability Company (LLC)?

A.  A multi-member LLC can be either a partnership or a corporation, including an S-corporation. To be treated as a corporation, an LLC has to file IRS Form 8832 and elect to be treated as a corporation. A multi-member LLC that does not elect to be treated as a corporation will be classified as a partnership.