When to Use Wyoming, Delaware, Texas, Nevada, or Florida for Entity Formation

The Real Tax Mechanics Behind “No-Tax” States

Entrepreneurs frequently form entities in states such as Wyoming, Delaware, Nevada, Texas, or Florida under the assumption that doing so eliminates state taxes. In practice, the tax outcome depends far more on entity classification, nexus, and where income is earned than on the state of incorporation alone.

This article clarifies:

1. When out-of-state formation actually creates tax savings

2. Why pass-through entities rarely benefit from “no-tax” states

3. How C-corporations can legitimately leverage these jurisdictions

4. How multi-state income sourcing and apportionment override formation state

1. Formation State vs. Taxing State: The Nexus Rule

A business is taxed where it has nexus, not merely where it is formed.

Nexus arises when a company has sufficient connection to a state through:

• Employees or offices

• Property or inventory• Sales exceeding economic thresholds

• Payroll or service delivery

Once nexus exists, the state can tax income attributable to that state, even if the company is

incorporated elsewhere.

In other words: Most states use apportionment formulas (based on sales, payroll, and property) to determine how much income is taxable in each jurisdiction.

2. The Pass-Through Fallacy: Why LLCs Don’t Escape State Tax

LLCs taxed as partnerships or S-corps are pass-through entities, meaning:

• The entity itself typically does not pay income tax

• The owners pay tax in their state of residence on their share of profits

Therefore:

• A North Carolina resident with a Wyoming LLC still pays North Carolina personal

income tax on the profits

• If the business operates in multiple states, the owner may also owe nonresident state taxes

where the income is sourced. Forming an LLC in a no-income-tax state does not eliminate personal state tax unless the owner also resides in a no-income-tax state. This is why “no-tax LLC” marketing is often misleading.

3. Where No-Tax States Actually Work: C- Corporations

“No state tax” jurisdictions are most powerful when used with C-corporations, because:

• C-corps are taxed at the entity level, not the shareholder level

• Retained earnings are taxed where the corporation has nexus

• Undistributed profits are not taxed to shareholders

If a C-corp:

• Is formed in Wyoming

• Has no physical presence or sales nexus in other states

• Operates remotely or internationally

Then it can legitimately avoid state corporate income tax in those other states.

This is meaningful because state corporate tax rates can be significant:

• Delaware: 8.7% corporate income tax

• Florida: 5.5%

• Many states impose 4–9% corporate tax on apportioned income

States like Wyoming and Nevada do not impose corporate income tax, making them attractive

for:• Holding companies

• IP companies

• Cash-accumulating C-corps

• QSBS planning structures

4. Income Sourcing Overrides Formation State

Even for C-corps, the key question is:

Where is the income earned?

If a Wyoming C-corp:

• Has employees in New York

• Generates sales in California

• Owns property in Texas

Then each state can tax the portion of income apportioned to that state.

Most states require corporate filing if the company:

• Is doing business there

• Is registered there

• Has income attributable to the state

Thus, simply incorporating in a no-tax state does not shield operating income generated elsewhere.

5. When Delaware Makes Sense

Delaware is not a tax play for most small businesses. It is a legal infrastructure play.

Use Delaware when:

1. You Are Raising Venture Capital

• Investors prefer Delaware C-corps

• Well-developed corporate case law

• Predictable Court of Chancery

2. You Need Complex Equity Structures

• Multiple share classes

• Stock options and SAFE instruments

• M&A readiness

3. You Plan to Issue QSBS-Eligible Stock

C-corp structure is required for §1202 planning.

However:

• Delaware imposes an annual franchise tax (minimum $300 for LLCs)

• Operating in another state still requires foreign registration and local taxes

For most closely held operating companies, Delaware adds cost without tax savings

Protection Structures

Wyoming offers:

• No state personal income tax

• No corporate income tax

• Strong charging-order protection

• Low annual fees

This makes Wyoming ideal for:

Best Use Cases

• Holding companies

• IP licensing entities

• Real estate holding LLCs (when property is outside high-tax states)

• C-corps retaining earnings

• Multi-entity asset-protection structures

Wyoming has become popular due to lower fees and stronger asset protection compared to

Delaware for small and mid-size companies.

Not Ideal For

• Operating businesses with employees and offices in high-tax states

• Local service companies

• Businesses with single-state operations

7. Nevada: Privacy and No Corporate

Income Tax

Nevada offers:

• No corporate income tax

• No personal income tax

• Strong privacy protections

However:

• Annual business license and fees are higher than Wyoming

• No meaningful tax benefit if the business operates elsewhere

Use Nevada for:

• High-privacy ownership structures

• Certain asset-protection plays

• C-corp holding entities

8. Texas and Florida: Operational No-

Income-Tax States

Texas and Florida are different from Wyoming and Nevada because they are:

• Large operating states

• With no personal income tax

This creates real savings for pass-through owners who live there.Texas

• No personal income tax

• Franchise (gross receipts) tax instead of corporate income tax

• Strong for operating companies

Florida

• No personal income tax

• Corporate tax of 5.5%, but first $50,000 exempt

For pass-through businesses.

9. Strategic Entity Structuring Model

For high-level tax planning, the optimal structure often looks like:

Operating Company

• Formed and registered where operations occur

• Pays tax on apportioned income

Holding Company (Wyoming or Nevada)

• Owns IP, trademarks, or equity

• Receives royalties or dividends

• Retains earnings in a no-tax jurisdiction

C-Corp Layer (for growth companies)

• Used for QSBS planning

• Retains earnings

• Located in no-tax state if operational nexus is limited

This allows:

• Income shifting through arm’s-length royalties

• Asset protection

• State tax deferral on retained earnings

10. Common Misconceptions

Myth: Forming in Wyoming eliminates state tax

Reality: You are taxed where you operate and where you live.

Myth: Delaware saves taxes

Reality: Delaware is a legal and capital-raising strategy, not a tax strategy.

Myth: LLCs avoid state tax

Reality: Owners pay tax in their home state on pass-through income.

Myth: No-tax states eliminate all state obligations

Reality: Nexus and apportionment rules still apply.

11. When to Choose Each State

Wyoming Holding companies, asset protection, retained

C-corp earnings Single-state operating businesses

Delaware VC-backed startups, complex equity, M&A readiness Small service firms

Nevada Privacy structures, C-corp holdings Cost-sensitive small businesses

Texas Operating companies with Texas presence Pure holding entities

Florida Pass-through owners residing in FL Multi-state businesses with nexus

elsewhere.

12. The Real Tax Lever: Residency + Nexus +

Entity Type

State tax optimization depends on three variables:

1. 2. 3. Where the owner lives → drives pass-through taxation

Where the business operates → drives income sourcing and nexus

Entity classification → determines whether tax is paid at the owner or entity level

“No-tax” incorporation is only effective when all three align.

Final Position (Advisory Perspective)For most clients:

• LLC in a no-tax state does not reduce state tax

• C-corp in a no-tax state can reduce entity-level tax on retained earnings

• Real savings come from multi-entity structuring and residency planning, not simple out-

of-state formation

The decision should be driven by:

• Capital strategy

• Exit planning (QSBS eligibility)

• Nexus footprint

• Owner residency

• Asset-protection goals

Not by marketing claims about “tax-free LLCs.”