The best states to form an LLC are Delaware, Nevada, Wyoming, Alaska, and South Dakota due to favorable climates, low fees, and tax benefits.
To avoid misinformation and late filings, stay updated on your state’s LLC taxes like franchise, sales, and employment. This article provides an overview of LLC taxes by state, covering franchise, sales, income, gross receipts, withholding, and employment taxes. Read to gain understanding of LLC tax requirements in your state and ensure compliance.
An LLC pays taxes differently depending on the number of members. Single-member LLCs are seen as sole proprietors by the IRS, where income and expenses go on the member’s tax return. Multi-member LLCs are seen as partnerships and must file Form 1065, with each member then reporting profit/loss on personal tax returns. However, some states tax LLCs’ net profits.
The self-employment tax rate for LLCs is 15.3% on net earnings. For instance, if an LLC has $100,000 profit, it owes $15,300 in self-employment tax. Most states have annual fees for LLCs; for example, New York requires single and multi-member LLCs to pay $25-$4,500 annually. Consider your home state even if it has higher fees/taxes than the "best" states as forming elsewhere can lead to extra filings and costs.
Of Fortune 500 firms, 66.8% incorporate in Delaware due to business-friendly laws, such as the General Corporation Law. Wyoming lacks personal and corporate income taxes and promotes anonymity through lifetime proxy. Alaska also has no corporate income or sales taxes. However, despite these advantages, your home state is often the best for forming an LLC due to the complexity of non-resident filings.
When taxed as either a sole proprietorship or a partnership, LLCs function as a pass-through entity for tax purposes. LLCs can also elect to be taxed as either an S-corp or a C-corp.
South Dakota boasts the lowest taxes for LLCs that elect to be taxed as a corporation, with a 0% corporate tax rate, and no taxation on business inventory, personal property, and inheritances.
It’s crucial to be aware of the fines for LLCs illegally transacting business in their state, as these can vary significantly. In some states, fines can be hundreds of dollars per year, while in others they can be thousands.