Where should I file my small service business to reduce revenue taxes: LLC in Texas or Delaware?

Thanks for your question! Texas and Delaware have separate tax frameworks so this response will provide general details on tax liabilities for limited liability corporations and then analyze each state’s tax structure separately.

Limited Liability Corporations (LLCs) are not taxed on their profits directly. Instead, profits “pass through” the business and the LLCs members report the profits on their personal federal and state tax returns (if the state has a personal income tax). Assuming your business is not automatically classified as a corporation, the IRS will either treat your firm as a sole proprietorship if your LLC has one owner or a partnership if the LLC has more than one owner. If your LLC is a sole proprietorship, you will report its profits or losses on your personal income tax return. If your LLC is a partnership, you and your partners will report its profits or losses in proportion to your ownership shares in the firm.

Delaware LLCs are classified as partnerships for state income tax purposes and must pay a franchise tax and registered agent tax. There is no sales tax on goods or services. And you will not pay state business income tax unless your firm does business in Delaware. If you provide more information, I can advise you on special taxes that you may have to pay should you incorporate within the state.

On the other hand, limited liability corporations registered in Texas generally only have to pay franchise, property, and sales taxes. Texas does not have a personal income tax. Texas does, however, impose special taxes on firms operating in certain sectors. Here is an organized list that should help you assess whether your tax liability in the state would be too onerous:

Automotive Businesses

o Oil manufacturers, distributors, and importers that sell motor oil to the public

o Firms that sell, store, or consume new or used lead-acid batteries

o Purchase boats in Texas or import boats from another state

o Businesses that sell, lease, purchase or rent heavy duty diesel equipment

o Companies that rent, sell, or purchase motor vehicles

Petroleum Products

o Firms that manufacture, produce, or import cement into Texas and distribute or sell the cement in the state

o Companies that own control, or furnish the tools, instruments, equipment, or chemical, electrical, or mechanical process used in providing natural gas or crude oil

o Businesses that purchase crude oil or supply / transfer gasoline and diesel fuel

o Companies that produce natural gas or sell and deliver the gas into a vehicle’s supply tank

Entertainment and Hospitality Businesses

o Casinos and horse racetracks

o Companies that sell alcohol, cigars, tobacco, cigarettes or provide sexually-oriented services

o Stores that harvest, purchase, handle, or store oysters

o Hotels, bed and breakfasts, condominiums, apartments, and houses that rent rooms at a rate higher than $15 a day

Financial Institutions, Public Utilities, and Insurance Companies

o Banks that charge an administrative fee for personal property loans and secondary mortgage loans

o Utility companies that do business within an incorporated city with a population greater than 1,000

o Foreign and alien insurers licensed to conduct business in Texas

o Car, home, fire, and farm insurance companies

o Insurance firms and HMOs licensed by the state of Texas

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