May 3, 2021
Having an LLC in Multiple States
As a business owner, you may live in a different state than where you work, or you may be looking to expand your client base into another state. You may have heard that some states have better tax situations for LLCs than the one where you live and operate. Or you may have customers in other states and are wondering what the requirements are for doing business in multiple states. Are you required to license your LLC in any state where you do business? What are the tax implications of operating in multiple states? We are here to help you navigate through some of these issues and answer your questions.
If you are looking for a quick answer: unless you are required to be registered in more than one state, registering exclusively in the state you reside in is the best choice 99% of the time. Multiple state registrations can be complex in nature and expose business owners to multiple taxing jurisdictions, regulatory requirements, plus more annual fees.
Now for the long answer: First you need to determine where your business’s home state is. The home state is generally where your main operations are. Typically, this is the state where you, the owner, live. After determining the LLCs home state, you will prepare to form the business. LLCs are formed by filing documents with the Secretary of State. You should obtain any additional business licenses, for sales taxes, employer payroll withholding, or based on location.
Second, you need to determine what states you will have additional operations in. Most states determine the licensing and registration requirements based upon whether you have nexus or significant business operations. There is not a universally recognized set of rules among the 50 states that determine if you have nexus or significant business operations. However, basic requirements include having a physical presence, such as a storefront, having employees, having an agent or representative operating in the state, or having a specific threshold amount of sales occurring in the state. A business owner must look at the specific rules in each state to determine if they have nexus or significant business operations which would require additional licensing and registration.
If you determine that you have a physical presence or nexus in another state, you do not need to form a new LLC in that state. Most states offer registration as a foreign qualification, a foreign entity, or as an LLC qualifying to do business. Each state is different with various requirements for documentation, registration, and fees. Generally, the forms and fees for foreign LLCs are shorter, less complex, and more affordable than forming a new LLC.
You have submitted the forms, licensed, and registered your business in multiple states, and paid all the applicable fees. The next step is to determine what taxes need to file and pay in these other states. Some states have sales taxes, or use taxes, while other states have state income taxes. Knowing the filing requirements and frequencies is important for budgeting and ensuring compliance. It is also important for ensuring that you are not being taxed twice.
Double taxation occurs when a business (or individual) pays tax on the same income twice. A multi-state LLC may be subject to double taxation when it reports income on the home state return and must report the same income on the state return where the money was sourced. In practice, this typically still does not result in double taxation due to tax credits between states or being able to apportion income, but there are situations it is possible to be double taxed. Many states will require the business to file tax returns if they create a nexus.
Some states have reciprocity agreements in effect. The reciprocity agreements between states allow residents to pay tax where they live instead of where they work. These agreements may allow a business to pay tax in its home state, rather than the states where other locations are operating. Reciprocity agreements generally eliminate the need to file non-resident state tax returns.
Many states have apportionment forms embedded into their business tax returns. This allows a business operating in multiple states to file multiple state tax returns and apportion the income between the different states based on its source. Apportionment provides a business with a way to avoid paying state taxes on the same income twice. The formulas generally consider certain factors, such as the proportion of payroll and sales that occur in each state and the proportion of property owned in each state.
LLCs have the option to be taxed at the federal level as an S-Corporation. Generally, state tax laws align with federal tax laws regarding the pass-through taxation of S-Corporations. However, some states, including New Hampshire, Texas, and Tennessee, tax S-Corporations the same way as C-Corporations, rather than allowing the tax attributes to flow to the shareholders. This can complicate tax issues with businesses that operate in multiple states.
One other issue to consider when electing to operate in multiple states is the taxation implications for the LLC owner. Pass-through entities, such as S-Corporations, LLCs taxed as S-Corporations, partnerships, and LLCs taxed as partnerships, may require the owner(s) to file personal state income tax returns in each state where the business has established nexus. Some states provide a consolidated return that the business can file on behalf of the owner(s), while other states prohibit filing consolidated returns. Single-member LLCs will report the income and expenses of the business on the owner’s personal return, and the owner may need to file an individual return in every state where the business operates.
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