LLC vs S-Corp: State-by-State Costs and Considerations
How state laws and fees affect the LLC vs S-Corp decision. Formation costs, annual fees, franchise taxes, and the best states to form a business.
Why State Matters for Business Structure
The federal tax benefits of an LLC or S-Corp are the same regardless of where you form. But state-level formation fees, annual reporting requirements, franchise taxes, and state income tax treatment vary significantly. In some states, the S-Corp election adds meaningful costs that change the breakeven calculation. In others, the additional costs are minimal.
You also do not have to form your LLC in your home state. Many small businesses form in Delaware, Wyoming, or Nevada for specific legal and privacy benefits, even if they operate primarily in another state. However, operating in a state typically requires registering as a foreign entity in that state, which adds fees.
State-by-State Formation and Annual Fees
| State | LLC Formation Fee | Annual Report Fee | S-Corp Notes |
|---|---|---|---|
| California | $70 | $20 | $800 minimum franchise tax applies to both LLC and S-Corp |
| Delaware | $90 | $300/year | Strong legal framework, no Delaware tax if not operating there |
| Wyoming | $100 | $60/year minimum | No state income tax, strong privacy protections |
| Nevada | $425 | $350/year | No state corporate income tax, strong asset protection |
| Texas | $300 | No fee (franchise tax based on revenue) | Franchise tax applies to both LLC and S-Corp over $2.47M revenue |
| Florida | $100 | $138.75/year | No personal income tax, low ongoing costs |
| New York | $200 | $9/year + biennial statement | Publication requirement in NY (can cost $1,000+) |
| Washington | $200 | $60/year | No state income tax, B&O tax applies |
| Colorado | $50 | $10/year | Very low fees, simple process |
| Montana | $70 | $15/year | No sales tax, low business costs |
California: The Most Expensive State for S-Corps
California's tax treatment significantly affects the LLC vs S-Corp calculation for California residents. Both LLCs and S-Corps in California pay an $800 minimum franchise tax annually. S-Corps also pay a 1.5% net income tax on California income. LLCs pay a gross receipts fee (not income tax) that starts at $900 for income over $250,000.
For California residents, the additional state-level taxes make the S-Corp election less attractive than in states with no income tax or simpler business tax structures. The breakeven income threshold in California is higher, often $80,000 to $100,000 or more in net profit. A California-based business owner should model the state taxes carefully before electing S-Corp status.
Best States to Form an LLC (If You Can Choose)
Many online businesses and remote service providers have flexibility in where they form their LLC. The most commonly recommended states for formation based on low fees, strong legal protections, and privacy provisions:
Wyoming: Best Overall for Small Business
Wyoming has no state income tax, low formation and annual fees, strong charging order protection (creditors cannot take over your LLC), and allows anonymous ownership. The annual fee is based on assets in Wyoming (minimum $60/year). Very popular for online businesses and real estate holding LLCs.
Delaware: Best for Future Investment or Sale
Delaware's Court of Chancery has the most developed body of corporate law in the US. If you plan to raise venture capital, sell to a private equity buyer, or eventually take the company public, Delaware is the standard choice because investors and lawyers know how to handle it. The $300 annual franchise tax is higher than other states, but the legal benefits are real for growth-oriented businesses.
Your Home State: Often the Simplest Choice
If you operate primarily in one state, forming there avoids foreign registration fees in your operating state. For most small businesses with under $200,000 in revenue, the fees saved by forming in Wyoming or Delaware are less than the cost and complexity of maintaining two state registrations (home state foreign qualification plus the formation state).
New York's Publication Requirement
New York State requires LLCs to publish a notice of formation in two newspapers in the county where the LLC's office is located. This must be done within 120 days of formation, and the cost varies dramatically by county. In Manhattan, the total publication cost routinely exceeds $1,500. In less urban counties, costs may be $200 to $400.
This publication requirement is unique to New York and is a significant hidden cost for New York LLCs that many new business owners are not aware of. If you are forming an LLC in New York, budget for this requirement. Legislation to abolish the requirement has been repeatedly introduced but has not yet passed.
State Income Tax on S-Corp Distributions
Federal law allows S-Corp distributions to avoid payroll taxes. However, state law is not uniform on this point. Most states follow federal S-Corp treatment. A handful of states (New Jersey, for example) impose their own payroll or employment taxes on S-Corp income that reduce or eliminate some of the S-Corp tax benefit.
Work with a CPA who understands your specific state's treatment of S-Corp distributions. The federal analysis is straightforward; the state analysis requires local expertise.