State income tax and your LLC: why forming in Wyoming isn't what keeps you out of it

Wyoming has no income tax, and sales pages make a lot of that. It's true, but it's mostly beside the point. A state taxes a company's income when the company does business there, not because it was formed there. A Wyoming LLC with an office in Texas deals with Texas. For a founder abroad, the question isn't where you formed but whether you operate in any state.

Forty-one states and the District of Columbia tax wage income, and most of them tax an LLC's profit to its owners as personal income, based on how much of the business happens in the state. Nine states don't tax wages at all. A non-resident owner pays a state's income tax only on income sourced to that state, and each state has its own rules for that, based on things like where the work is done, where goods are delivered and where property is.

• An office or employees in the state, including a single remote employee working from home there.
• Inventory in the state, including in a third-party or Amazon warehouse, which several states treat as a presence for income tax.
• Property in the state, including a rental.
• Sales into the state above a set threshold, in the states that use economic nexus rules for income tax, which is a growing minority.

A company with any of these usually has to register in that state as a foreign LLC, file its return, and pay tax on the share of income the state's formula assigns. Wyoming's lack of income tax doesn't help with that.

Some states tax companies on something other than profit, so they can reach a company that operates there even in a year without a profit. Washington's business and occupation tax and Ohio's commercial activity tax are on gross receipts. Texas's franchise tax is on margin, once revenue passes a threshold. Tennessee's franchise and excise taxes apply to LLCs. California charges every LLC $800 a year, plus a fee once its California income reaches $250,000. New York City has an unincorporated business tax. Most of these apply because a company operates in the state, but a few apply just because the LLC was formed there: California's $800, Kentucky's $175 minimum entity tax, Rhode Island's $400 yearly charge, and Tennessee's franchise and excise taxes. Each state has its own page with the figures.

Wyoming has no personal or corporate income tax and no franchise tax, so its $60 annual report is its only recurring charge. Delaware doesn't tax the income of a company that doesn't operate there. Its $400 yearly LLC tax and its corporate franchise tax are charges for existing there, not for earning. Neither state changes what another state can tax if you operate in it.