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April 16, 2009 - Phil Hodgen

U.S. tax filing requirements for nonresident owners of Delaware LLCs

Delaware has a reputation (amongst BS artists and politicians, oops sorry for being redundant) for being a tax haven.

Here’s a bit of reality for you. How you use this reality is up to you. I’m limiting this discussion to Federal income tax. Not State income tax. There are too many variations on the State side.

Assume these facts

Nonresident human being or non-U.S. corporation owns all of the membership interests in a Delaware LLC. In other words, there is one owner.

U.S. tax treatment

The Delaware limited liability company is by default treated as a disregarded entity for U.S. tax purposes. It is a “tax nothing.” It doesn’t exist. The default treatment can be changed by filing Form 8832 and electing an alternate treatment. (PDF).

This means that if the Delaware limited liability company has any income it does not file an income tax return with the U.S. Federal government’s tax collection bureaucracy, the Internal Revenue Service. Instead, the owner of the Delaware limited liability company is on the hook to file a U.S. income tax return.

The Delaware limited liability company’s income is treated as if it is earned directly by the owner.

The owner (whether human or corporate) looks to the U.S. tax law to see whether the income received by the Delaware limited liability company is taxable in the United States. If so, it is tax return time. A nonresident/noncitizen human files Form 1040-NR (PDF) and a non-U.S. corporation files Form 1120-F (PDF).

Why pick on Delaware?

So. Does that make Delaware a tax haven? You can do exactly the same thing in any of the other States if you want to. Same result.

Why pick on Delaware if this is a Federal tax law–not a Delaware law–that caused the result?

Poor little Delaware.

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