Where do we pay tax?

[theboxer]

We are starting an LLC in Delaware, but will be operating solely in Maryland. It will be taxed as an S Corp. We, the shareholders, reside in MD. Where do we pay tax on our profit from the business? Obviously, we know the business doesn't pay any tax itself because it's a passthrough entity, but, personally, do we pay tax on the profits in DE because its incorporated there, or are we paying MD tax because we live in MD?

Thanks!

 

[FlyingRon]

You pay your personal income tax in Maryland where you are residing and working.
As far as the corporation goes, you need to pay the $175 or so franchise tax to Delaware each year, even for S corps. You also need to file with MD ($300) each year as well.

 

[theboxer]

You pay your personal income tax in Maryland where you are residing and working.
As far as the corporation goes, you need to pay the $175 or so franchise tax to Delaware each year, even for S corps. You also need to file with MD ($300) each year as well.

Thanks for your reply!

 

[Taxing Matters]

We are starting an LLC in Delaware, but will be operating solely in Maryland. It will be taxed as an S Corp. We, the shareholders, reside in MD. Where do we pay tax on our profit from the business? Obviously, we know the business doesn't pay any tax itself because it's a passthrough entity, but, personally, do we pay tax on the profits in DE because its incorporated there, or are we paying MD tax because we live in MD?

Thanks!

Are you doing any business at all in Delaware? If the answer is no, then why form the LLC there? While I agree with FlyingRon that if the corporation does no business in Delaware there will be no income tax for the owners to pay to that state, you do end up with paying a franchise tax to Delaware that you otherwise would not have to pay. You also end up paying corporate registration fees in two states, since Maryland will require the business to file as a foreign LLC since it is conducting business in that state. Also, note that by organizing in Delaware your business may be sued in both Delaware (where it is organized) and in Maryland (where it is doing business). In most cases there is no good reason for a small closely held business to organize in any state other than one in which it conducts a significant amount of its business. The fact that lots of big publicly traded companies form entities in Delaware, Wyoming, Colorado, and Nevada does not mean that it's a good idea for small businesses to do it. The reasons the big companies do it have a lot to do with things that do not concern small publicly traded companies. You might want to consult a Maryland business attorney before you set up the LLC to make sure that you'll actually benefit from organizing in Delaware. I think it likely you'd do better just organizing in Maryland.