If you are a Massachusetts resident with an LLC registered in another state, your taxes could be negatively impacted. Find out the potential cons of this tax situation below:
Massachusetts Taxes Still Apply
Even if you form your LLC in a tax-friendly state, Massachusetts will still tax you on the income generated from your LLC if you’re a Massachusetts resident. Massachusetts imposes an income tax on all residents. This means that if you’re living in Massachusetts, you’re subject to Massachusetts state income tax regardless of where your LLC is formed. You’ll still need to file taxes in MA on the LLC income, and the tax-friendly state’s benefits may be diluted because you’ll pay taxes in MA.
Foreign LLC Registration in Massachusetts
If your LLC is formed outside of Massachusetts, you will need to register it as a foreign LLC with the Massachusetts Secretary of State in order to do business in Massachusetts. This includes conducting business within the state or having a physical presence. There are additional registration fees and annual reporting requirements for the foreign LLC, which can add to your administrative burden and costs.
Annual Reporting and Fees
Some tax-friendly states, like Delaware, have annual franchise taxes or fees for LLCs, which might be higher than what you’d pay in Massachusetts. For example, Delaware has a flat annual franchise tax for LLCs. It is relatively affordable but still a cost you should consider. You may also need to file an annual report for your foreign LLC in Massachusetts, depending on your LLC’s activities.
Potential for Double Filing
You will likely need to file taxes in both the state where the LLC is formed (if required by the state) and in Massachusetts. For example, if you form an LLC in Delaware, you’ll still have to file your taxes in MA, and you may have to file a Delaware LLC tax return even if there is no income to keep the LLC in good standing.
Administrative Complexity
Operating an LLC in a state that’s different from where you live requires more administration. You may need a registered agent in the state where the LLC is formed and ensure that you’re complying with the regulations in both states. Having a registered agent and keeping track of filing deadlines in multiple states can add time, effort, and costs.
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