Your LLC Is Growing In Other States—Now What About Sales and Income Tax Nexus?

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1. Feature: Your LLC Is Growing In Other States—Now What About Sales and Income Tax Nexus? (5 min read)

2. From the Archive: Should Your LLC Elect S Corporation Status? The Real Deal. Read it here.

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Your business is growing. That’s worth celebrating. But as you start selling beyond your home state, new tax responsibilities creep in. You may need to open income and sales tax accounts in other states—even if your business is physically located in just one. And if you're a single-member LLC or partnership, you might wonder if electing C corp status could save you the trouble of filing personal tax returns in multiple states.

This article walks you through what nexus means, how to evaluate tax risks, and whether C corporation taxation makes sense for your situation.

Understanding Nexus: When Out-of-State Sales Create Tax Obligations

"Nexus" means your business has a sufficient connection to a state to be subject to its tax rules. There are two main types:

• Sales Tax Nexus: Typically triggered when your annual sales in a state exceed a revenue or transaction threshold. For example, South Dakota requires registration once sales exceed $100,000 or 200 transactions. California, by contrast, uses a sales-only threshold of $500,000.

• Income Tax Nexus: This applies when your business activities in a state—like hiring employees, engaging contractors, or storing inventory—create a taxable presence. Even third-party warehouses (like Amazon FBA) can trigger this.

The Risks of Ignoring Nexus

Failing to register for tax obligations in states where you’ve triggered nexus can hurt you. Here’s how:

• Penalties and Interest: States can assess back taxes plus fines and interest.

• Audits: States increasingly use e-commerce data and shipping records to track sellers.

• Brand Damage: Noncompliance can alienate customers and damage trust.

Your Compliance Checklist: Five Steps to Stay Ahead

1. Track Sales by State
Pull data from your e-commerce platforms or accounting software. Look at total sales dollars and number of transactions by state. Sales-heavy states are where nexus is most likely.

Pro Tip: Shopify, QuickBooks, and Amazon often offer state-by-state reporting tools.

2. Check Each State’s Rules
Visit the website of each state’s department of revenue. For sales tax, review economic nexus laws. For income tax, check what kinds of activity create a taxable presence.

Shortcut: Tools like Avalara or TaxJar can help but always verify with official state guidance before assuming compliance.

3. Decide on Timing Based on Risk Tolerance
If you're nearing a threshold, decide whether to register now or wait. Registering early reduces audit exposure. Waiting might save time in the short term but invites risk.

Be aware: In many states, tax liability begins the moment you exceed nexus thresholds—even if you haven’t registered yet. Delaying registration may result in backdated tax assessments and penalties.

Ask yourself:

• Are your sales in that state rising?

• Do you have bandwidth for extra filings?

• Can you afford back taxes if audited?

4. Register Where Required
If you’ve triggered nexus, register for a sales or income tax account with the state. Most offer online portals. Once registered, collect sales tax immediately. Also check how often you're required to file—monthly, quarterly, or annually.

5. Set Up Systems to Stay Compliant
Use tax software or hire a bookkeeper to track filing deadlines. For income taxes, work with a CPA. And keep detailed records. If you're ever audited, you’ll need documentation.

Should You Elect C Corporation Status?

Here’s the heart of the issue: If your LLC is taxed as a sole proprietorship or partnership, your members may need to file personal income tax returns in each state where your business has income tax nexus.

That’s a pain.

Electing C corp status could relieve that burden. But there are trade-offs.

How It Works:
As a C corporation, the business becomes a separate taxpayer. It files its own income tax returns in each state where it has nexus. You only report salary or dividends received—not the company’s full income—on your personal tax return.

This generally means you won’t be required to file personal returns in other states unless you receive income sourced to that state, such as wages, director fees, or physical presence. However, filing obligations vary, and some states may still require informational returns or impose minimum thresholds.

Pros:

• No more personal filing in multiple states (in most cases).

• Easier to manage multistate operations.

• Preferred structure for raising capital.

Cons:

• Double Taxation: The C corp pays tax on profits, and you pay again on dividends. But if you reinvest earnings or pay yourself a salary, this can be minimized.

• More Formality: C corps must file Form 1120, keep corporate minutes, and observe other rules.

• No Pass-Through Losses: Losses stay with the company.

• Franchise Taxes: States like Texas, Delaware, and California impose annual franchise taxes or gross receipts taxes on corporations, regardless of profitability. These are separate from income taxes and can apply even to inactive entities.

Step-by-Step: Deciding If a C Corp Election Makes Sense

1. Estimate the Compliance Burden
Will your LLC face personal filing requirements in one or two states, or five or more? The more states involved, the more appealing C corp status becomes.

2. Compare Tax Outcomes
Work with your CPA to run the numbers. Model both pass-through and C corp scenarios including state taxes and dividends.

3. Factor in Your Growth Plans
If you expect to expand nationally or seek funding, C corp status may be a long-term win.

4. Assess Your Capacity
Do you have time and resources for the added complexity? If not, sticking with pass-through status may be more practical.

5. Talk to a Professional
This is not a DIY decision. A CPA or tax attorney can guide you based on your specific profile.

What About S Corp Status?

Good question.

S corps are still pass-through entities. That means shareholders must usually file personal returns in any state where the S corp has income tax nexus.

However, a few states offer compliance shortcuts:

• Composite Returns: Some states, like Wisconsin and Colorado, allow S corps to file a composite return for nonresident shareholders, or withhold tax on their behalf. These options can reduce individual filing requirements, but they are state-specific, and shareholder participation or additional forms may still be required.

Bottom Line: S corp status can help in specific states, but it’s not a broad solution.

Wrapping Up

As your business expands, tax compliance gets trickier. But with a clear understanding of nexus, a solid tracking system, and the right structure, you can stay ahead.

Electing C corp status may help your members avoid filing personal tax returns in multiple states. Just make sure the tax costs and compliance responsibilities fit your business goals. And don’t forget: a good CPA can make all the difference.

Keep growing.

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