State Income Tax Considerations for Pass-Through Entities: What Business Owners Need to Know

Publications Apr 8, 2025

When forming an LLC or S-Corporation, many business owners wonder if registering in a “business-friendly” state like Delaware, Nevada, or Wyoming can help them save on taxes. However, for pass-through entities, state income tax liability is based on where you live and do business, not where your company is registered.

Where Do You Pay State Taxes?

Because LLCs and S-Corps are pass-through entities, business profits are not taxed at the company level. Instead, they “pass through” to the owners, who report the income on their personal tax returns. This means:

You owe state income tax in the state where you live and work, not where your LLC or S-Corp is registered.
If you operate in multiple states, you may owe taxes in each state where income is generated.
Registering in a low-tax state does not eliminate state tax liability if you conduct business in a high-tax state like California or New York.

Example: How State Tax Rules Apply

Imagine you live and work in New York but register your LLC in Wyoming to take advantage of its business-friendly policies. Even though Wyoming has no state income tax, New York still taxes your business income because that’s where you reside and operate.

Similarly, if your business earns income in multiple states, such as a consultant working with clients nationwide or a rental property owner with units in several states, you may need to file tax returns in each of those states.

What About Business-Friendly States Like Delaware or Wyoming?

Many states, like Delaware, Nevada, and Wyoming, attract businesses with benefits such as:

No state corporate income tax (for corporations)
Strong legal protections
Enhanced privacy for business owners

While these advantages may be beneficial for C-Corporations or businesses with complex legal needs, they do not eliminate personal state income tax obligations for LLCs and S-Corps.

Choosing the Right State for Your Business

If you plan to live and operate in one state, it is usually best to form your LLC or S-Corp in that state to avoid additional registration and compliance costs. If you do business in multiple states, you may need to register as a foreign entity in each one, potentially increasing fees and administrative requirements.

Choosing the right business structure and registration state is a critical decision that impacts taxes, liability, and compliance requirements. Our experienced legal team can help you make the best choice for your business. Contact us today to discuss your options.

About Greenspoon Marder

Greenspoon Marder LLP is a full-service law firm with over 225 attorneys and more than 20 office locations across the United States. With operations from Miami to New York and from Denver to Los Angeles, our firm attracts some of the nation’s top talent in key markets and innovation hubs. Our core practice areas include Real Estate, Litigation, and Transactional Services, complemented by the capabilities of a full-service firm. Greenspoon Marder has maintained a spot on The American Lawyer’s Am Law 200 as one of the top law firms in the U.S. since 2015, and our goal is to provide exceptional client service by developing a thorough understanding of each client’s business needs and objectives in order to provide strategic, cost-effective solutions.

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This Greenspoon Marder LLP Client Alert is issued for informational purposes only and is not intended to be construed or used as general legal advice nor a solicitation of any type. Please contact the author(s) or your Greenspoon Marder LLP contact if you have any questions regarding the currency of this information. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer’s legal qualifications and experience.

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State Income Tax Considerations for Pass-Through Entities: What Business Owners Need to Know

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