Tax information for entrepreneurs wanting to start a limited liability company (LLC)
According to statistics from the U.S. Census Bureau, new business applications are 2.5% down from May 2022 to June 2022. There can be many reasons for the decline, but even though the numbers have decreased, there were still over 400 000 business formation applications logged.
Entrepreneurs are still seeing gaps in the market to be filled, and many people are taking the leap to become owners of their own businesses.
An important factor to consider when starting a new business is located. This is going to determine the amount of business tax to be paid. We have made a comparison of business taxes for three popular states to start an LLC, and Wyoming has come out on top.
Corporate tax is imposed on the profits of corporations in the U.S. At the federal level, the tax is at a flat rate of 21%, but how do the states compare?
Wyoming comes out as a winner as it is the only state in the U.S. that does not impose a corporate tax.
California has some of the highest state taxes in the U.S. A flat rate of 8.84% corporate tax is charged for an LLC electing to be taxed as a C-corporation. For LLCs electing to be taxed as S-corporation, a 1.5% corporate tax applies.
The state of New Mexico imposes a generic corporate tax rate on all domestic businesses of 5.9%
Personal Income Tax
Personal income tax is the taxes that individuals have to pay on their income received. LLCs are considered pass-through entities, which means that members do not have to pay business tax on a federal level but are taxed on their individual income.
The state does not levy a personal income tax. This means that LLC owners will generally not pay any state income tax on profits earned from the business.
California has nine state tax personal income brackets, which can be anything from 1% up to 12.3% Residents and non-residents are required to pay taxes on income received from a California business.
Personal income tax is between 1.7% and 5.9%. As with California, residents, as well as non-residents, must pay taxes on income received from New Mexico businesses.
Sales taxes are taxes collected from the sale of goods and services. All LLCs are subject to sales tax for services rendered or goods sold.
The state sales tax for Wyoming is 4% for all goods and services purchased in Wyoming.
California has a state sales tax of 7.25% The rate is made up of a 6% base rate plus an additional mandatory local rate of 1.25% which goes to the local councils. Depending on the jurisdiction, sales tax can be as high as 10.25%
The state does not have a sales tax but imposes a similar “Gross receipts tax.” The rate can be anything from 5.13% to 9.1% depending on the location of the sale.
This type of tax is often charged to businesses for the right to do business in the state.
The state of Wyoming does not impose franchise taxes. There is, however, an annual license tax that must be paid in the amount of $50 or a small percentage of the LLCs asset value in the state.
An LLC must pay a minimum of $800 franchise tax even if the business does not make any money. Businesses are, however, exempt from paying this tax for the first year of operation.
An LLC that pays federal income tax must also pay a fee of $50 per year franchise tax.
Wyoming ranks number 1 for its favorable tax climate, especially for LLCs. On the opposite spectrum, California has some of the highest tax rates in the country, with New Mexico sitting in the middle of the pack.
Of course, taxes aren’t the only factor to be considered when starting a new business, but knowing what you are in for before taking the entrepreneurial leap, can help with planning and strategy.