In the aftermath of the global pandemic, the number of business applications skyrocketed as the appeal of entrepreneurship grew to many. American Census data reveals that these applications were concentrated in a small number of states. In particular, Wyoming, Texas, South Dakota, and Nevada received the greatest increases over the 2020-2021 period.
This is not all that surprising considering these states frequently rank among the most popular for business creation, and have done for some time. But why are businesses attracted to these states in particular, and how do the benefits of each compare to one another. After expounding on why many businesses are forming as LLCs, this article will then answer these questions.
Why Choose An LLC?
A limited liability company (LLC) is a type of business entity that owners can elect for their business to be structured as. LLCs are an extremely popular choice for startups in particular since their inherent characteristics lend themselves well to businesses in this situation.
There are two primary benefits of LLCs that make them attractive to small business owners: their limited liability protection, and their status as a ‘passthrough entity’. The first of these describes the protection that is afforded to the personal assets of the LLC owner.
Furthermore, due to the delineation by LLCs of the border separating personal assets from business assets, the former is precluded from being pursued by creditors or in lawsuits in order to reclaim business debts. This remains the case as long as the business owner upholds this separation between the two asset types (i.e. by managing personal finances separate from business ones, etc).
The second benefit of LLCs refers to the way in which they pay less tax due to their ‘passthrough entity’ status. Moreover, since LLCs are not subject to the corporation tax on their profits that many other companies are, they are not subject to ‘double taxation’. This is because the profits pass straight through the company and to the owners’ salary, who are then liable for personal income tax and self-employment.
Why Wyoming?
Advantages
On top of the tax reductions LLCs already benefit from, those formed in the state of Wyoming are able to benefit from even greater tax flexibility. This grants Wyoming LLCs the opportunity to protect more of their profits from being eroded by tax, which can slow business growth over the years.
Specifically, LLCs are not subject to paying Personal Income Tax separately as long as they operate the business locally in Wyoming, Excise Tax on items like food or gas, Estate, Inheritance Tax, and Intangible Tax.
Overall, the way in which tax is regulated in Wyoming is one of the most business-friendly in the US because it grants specific exemptions for LLCs to enjoy. Specifically, manufacturing startups can leverage a Sales Tax exemption on relevant machinery, and manufacturing units are also exempt from Sales Tax on electricity.
There is also a privacy element of establishing an LLC in Wyoming that is appealing to many business owners. Namely that if a startup is formed in this state, there is no requirement for LLC members to be listed on a public database. This carries the added benefit of making owners more difficult to earmark to sue.
Disadvantages
It is certainly worth bearing in mind that Wyoming is by no means the ‘perfect’ state for business formation. Indeed, there are certain restrictions associated with basing one’s business here.
The first of these is the finite lifespan of LLCs in this state. While corporations are able to exist permanently, LLCs are constrained by all of their members staying alive and not bankrupt. If and when any member passed or became bankrupt, the LLC would die too.
Foreign businesses registering in Wyoming (which will be a large majority - attracted by the low levels of taxation), will, unfortunately, be faced with higher costs of administration. In situations where the business owner resides in another state, they will continually be required to return to their home state and file a foreign registration document.
Other Top States
Nevada
Another extremely popular state for business formation, Nevada’s appeal also comes from its very business-friendly taxation structure. Further, it has a 0% Corporate Tax rate, and a 0% rate of Individual Income Tax.
The local Sales Tax rate that applies to businesses in Nevada is noticeably lower than anywhere else in the country at 4.6%. The average Sales Tax for states across the U.S. is quite a bit higher at 5.09%.
Texas
Despite not being as competitive in terms of taxation as the other states on this list, Texas continues to be popular because of its ability to still offer a business-friendly climate. While not levying corporate or personal income tax by itself is quite underwhelming, when this is combined with the state’s very highly skilled workforce and strong economy, it is easy to see why it’s so popular.
South Dakota
Businesses continue to flock to South Dakota because of its pro-business environment. In terms of taxes alone, they are the only state in the whole of the U.S. that doesn’t levy corporate tax, personal property tax, personal income tax, inheritance tax, or inventory tax. Companies here can retain such a significant portion of their profits it’s hard to resist.
South Dakota is also home to a number of lucrative business incentives, such as its Reinvestment Payment Program and Variety Business Benefits Program. Both of these are available for LLCs to take advantage of in order to counteract startup costs.
Final Comments
On balance, each business will have to assess its own individual needs before settling on the optimal state to form for them. In many cases, forming in the state in which the owner resides is far more straightforward and cost-effective from a filing fees point of view.
However, for those businesses that would truly be able to take advantage of the benefits of these states, Wyoming represents an extremely strong option out of the four. Its advantages are not limited to the taxation benefits of the others and it has very few disadvantages. Many businesses should consider forming themselves as a Wyoming LLC and can learn more here.
