I am currently exploring in which state to form my LLC.
If I have an internet business that will sell in every state, does it make a difference where I incorporate? Will I have to pay taxes in CA if I sell there, for example? Would this apply to other states as well / would I have to file as a foreign entity?
Let’s separate the question of taxes into two major categories – income tax and sales tax (there are other taxes such as use tax an payroll tax, but let’s ignore them for now):
1. Income tax: LLC pays no income tax if it’s elected to be taxed as partnership/disregarded entity (this is default election). I presume that is the set up you are thinking about, so in that case you will pay personal income tax on the profit distributed to you by the LLC. As such state of registration doesn’t matter, since you pay taxes based on your personal state (place) of residence.
2. Sales Tax: Sales tax is paid by your clients if they purchase taxable items, and if your business has “economic nexus” in their state (also, if that state has sales tax to begin with). The issues relating to whether a business has a nexus in a state and is thus subject to the state’s taxing authority is complex and each state views the concept of nexus differently.
As far as Foreign Entity goes, you need to register it in each state where you have “physical nexus”, meaning strong connection by having offices, employees and other physical presence in the state.
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