When starting a business, one of the biggest decisions entrepreneurs face is where to form their company. Taxes play a huge role in this choice, especially personal income tax. In the United States, some states charge high personal income taxes, while others—like Texas and Florida—don’t charge any at all. This difference can have a major impact on how much money business owners keep in their pockets.
Let’s say you’re thinking about starting a consulting business. If you form your LLC in California, you’ll have to pay state income tax on any profits you earn from your business. For example, if your consulting business makes $100,000 in profit, you could pay up to $13,300 in California state income tax alone (since California’s top rate is 13.3%). But if you form your LLC in Texas or Florida, you won’t pay any state income tax on that same $100,000 profit. That means you get to keep thousands of dollars more each year—money you can use to grow your business, hire employees, or invest in new opportunities.
This big tax difference is one of the main reasons why so many entrepreneurs choose to form their LLCs in Texas and Florida. In this blog, we’ll explore exactly how the lack of personal income tax in these states makes them attractive for business owners, what other benefits and costs you should consider, and how this choice can shape your business’s future.

Tax Savings for LLC Owners

One of the key advantages for business owners forming an LLC in Texas or Florida is the significant tax savings resulting from the absence of personal income tax in these states. To understand why this is important, it helps to know how LLCs are generally taxed. By default, LLCs are treated as pass-through entities, meaning the business itself does not pay income tax. Instead, the profits “pass through” to the owners’ personal tax returns, where they are subject to federal income tax. However, many states also impose their own personal income taxes on this income, which can substantially reduce the amount owners actually keep.
In Florida, LLCs enjoy a complete exemption from state income tax on profits. For example, if a Florida LLC earns $200,000 in profit, the owners pay federal income tax on that amount but no state income tax. In contrast, if the same LLC were formed in California, which has a top state income tax rate of 13.3%, the owners would owe approximately $26,600 in state taxes on that $200,000 profit. This means that by choosing Florida, LLC owners can save over $26,000 annually just in state income taxes. Texas offers a similar benefit, as it also does not impose a personal income tax on LLC owners. This can translate into thousands of dollars saved compared to states like New York or New Jersey, which have state income tax rates ranging from 6% to over 10%.

Federal Tax Flexibility

Beyond avoiding state income tax, both Texas and Florida provide LLC owners with additional federal tax flexibility. LLCs can elect to be taxed as an S-corporation or a C-corporation, which can help optimize their overall tax burden. For instance, electing S-corporation status allows an LLC owner to split their income into a reasonable salary and distributions. The salary portion is subject to payroll taxes (Social Security and Medicare, totaling about 15.3%), while the distributions are not subject to these payroll taxes. This structure can significantly reduce self-employment taxes. To illustrate, imagine an LLC owner earning $100,000 annually. If taxed as a default LLC, they would pay self-employment taxes on the entire $100,000, totaling approximately $15,300. However, by electing S-corp status and paying themselves a $50,000 salary plus $50,000 in distributions, they pay payroll taxes only on the $50,000 salary, which amounts to about $7,650. This effectively cuts their self-employment tax bill in half, saving thousands of dollars each year
Alternatively, some LLCs choose to be taxed as C corporations. This can be particularly advantageous in Texas because the state does not impose a corporate income tax, unlike many other states. For example, a Texas C-corporation earning $500,000 would pay a flat 21% federal corporate tax ($105,000) but zero state corporate tax. In contrast, a California C-corporation with the same income would pay both the 21% federal tax and an 8.84% state corporate tax, adding roughly $44,200 in state taxes, increasing the overall tax burden significantly.
It is worth noting that Texas does have a franchise tax, which is a type of gross receipts tax, but it only applies to businesses with revenues exceeding $1.23 million annually. Therefore, many small and medium-sized LLCs in Texas pay no franchise tax at all, making it an attractive state for startups and growing businesses.

Formation and Operational Advantages

When deciding where to form an LLC, understanding the costs and operational requirements is just as important as tax savings. Texas and Florida offer attractive advantages in these areas, making them popular choices for entrepreneurs looking to minimize expenses and simplify management.

Lower Compliance Costs

In Florida, the initial cost to form an LLC is relatively low. As of 2025, the state filing fee for the Articles of Organization is $125. This fee covers the legal process of officially registering your business with the state. After formation, Florida requires LLCs to file an annual report to maintain active status, which costs $138.75. This annual report fee is essential to keep your LLC in good standing and avoid penalties, which can be as high as $400 if you file late. Overall, Florida’s fees are straightforward and budget-friendly for most small businesses.
Texas has a slightly higher initial filing fee of $300 to create an LLC. However, Texas does not charge an annual franchise tax for LLCs with revenue under $1.23 million, which means many small and medium-sized businesses pay no recurring state tax beyond the initial filing fees and standard compliance costs. This can lead to significant savings over time, especially compared to states with mandatory annual taxes regardless of income.
For comparison, California charges a minimum annual franchise tax of $800 regardless of how much revenue your LLC generates. This fee applies even if your business is just starting out and not yet profitable, making California one of the more expensive states for LLC maintenance. In contrast, Texas and Florida’s lower fees reduce the financial burden on entrepreneurs, allowing them to allocate more resources toward growing their business.

Simplified Management

Beyond costs, both Texas and Florida offer simplified management requirements that reduce administrative headaches for LLC owners. Either state mandates annual meetings or complex corporate formalities, which are common requirements for corporations. This means LLC owners can focus more on running their business and less on paperwork.
Additionally, both states provide flexibility in how LLCs are managed. You can choose a member-managed structure, where all owners participate in daily operations, or a manager-managed structure, where designated managers handle business affairs. This flexibility allows LLCs to tailor their management style to fit their size, industry, and growth plans without being forced into rigid governance models.