Your company does business where you do, not where you formed it
Updated: 5 days ago
This post opens an October series on who gets to tax you, and for what.
Forming an LLC in Wyoming, Delaware, or Nevada gives you a company there. It doesn't move your business there. The states that tax you are the ones where you live and where the work actually happens.
Nearly every tax you'll run into falls on one of four things: what you earn, what you own, what you spend, and what you transfer. Everything else is a variation on one of those four. Each of the next four posts takes one of them. But first, the question that sits under all four: which states can reach you at all?
Your formation state is the smallest part of the answer
The state you formed in is where your company exists on paper. It's where you file an annual report and keep a registered agent. That's usually about all it decides.
The states that matter are the ones where:
you live
you or your people do the work
you have property, like an office, equipment, or inventory
your customers are, once your sales there get large enough
Each of those can create obligations on its own, and they don't have to line up. That's why registration, licensing, and tax nexus are three different questions.
A Wyoming LLC run from California
This is a popular combination. Wyoming for privacy and low fees, California because that's where the owner lives.
If you run the business from California, California considers the LLC to be doing business there. An LLC is doing business in California when a member does business on its behalf in the state, and running the company from your kitchen table counts.
So the Wyoming LLC has to:
register with California as a foreign LLC
pay California's $800 annual LLC tax, plus an additional fee once gross receipts reach $250,000
file a California LLC return every year
keep up its Wyoming annual report and registered agent on top of all that
And the income? You pay California tax on it as a California resident, exactly as you would have with a California LLC. Wyoming saved you nothing on the tax side. You're paying two states' worth of upkeep for one state's worth of tax.
Skip the California registration and it gets worse, not better. California can still assess the tax and add penalties, and an unregistered company can't bring a lawsuit in California courts until it registers. The day you find that out is usually the day you need to sue someone.
A Washington LLC run from Idaho
This one runs the other direction, and it catches people who formed where they thought the tax was lower.
Washington has no personal income tax, but it does have a business and occupation (B&O) tax, which is a tax on gross receipts: revenue, not profit. Being organized in Washington is enough on its own to put a company within reach of that tax. The tax is measured by receipts attributed to Washington, but expect to register and file there either way.
Meanwhile, Idaho taxes you as a resident on all of your income, including your share of what the Washington company earns. Idaho gives residents a credit for income tax paid to other states. But a tax measured by something other than income isn't eligible, and B&O is measured by receipts. There's nothing for Idaho to credit.
And if you're running the business from your Idaho home, the Washington LLC is likely transacting business in Idaho and needs to register there too.
So a Washington LLC with an Idaho owner can end up with Idaho income tax, Washington gross receipts tax on its Washington revenue, and annual filings in both states. Forming in the no-income-tax state didn't avoid the income tax. It added a second tax.
What every state you're in expects
registration as a foreign entity
a registered agent in that state
an annual report and fee
tax registrations for whatever you owe there: income, sales, payroll, gross receipts
returns, sometimes even in years you owe nothing
There's one more that isn't on any form: records that show where your business actually is. When a state asks, the answer is in where you work, where your people are, and where your money moves. It isn't in your articles of organization.
When your formation state does matter
It does matter for some things: privacy on the public record, holding companies that don't operate anywhere themselves, and the investor expectations covered in Should you form in Delaware?
If you're carrying a formation state that isn't doing anything for you, moving your LLC to another state or dissolving it properly may cost less than maintaining two states indefinitely.
What to do
Write down three things: where you live, where you and your people work, and where your property is. Then add any state where your sales are large. Those are your states. Everything in the rest of this series happens in them.
Keep reading: Registration, licensing, and tax nexus are three different questions; Do I have to register in a state just because I bank there?; and Moving your LLC to another state.
Next in the series, Tuesday, October 6: Who taxes what you earn?
This is general information, not legal advice for your situation. If you want an answer for your business, book a consultation.
