One of the first important decisions a new business owner must make is choosing a legal entity to run a business. Should she be a sole proprietor without a separate legal entity? Or should she form a corporation (C-corp or S-corp), partnership or limited liability company (LLC)?
Then this new owner should decide in which forum or state to form the entity. The state of formation is not required to be the state the owner resides in, and she can choose the state with laws that are most favorable to her situation.
It can be difficult to determine the best legal structure for your business. Which entity makes the most sense for a new business depends on many factors, but new owners usually create entities for liability protection and tax efficiency.
Many business owners choose to form Wyoming LLC’s for the ease of formation. But below are several more benefits a Wyoming LLC offers small business owners. We will also discuss ways a Wyoming LLC can be used to protect and grow your business.
Advantages of forming a Wyoming LLC:
1. Wyoming has no state income tax
Wyoming is one of very few states that do not have personal or corporate income tax.
Most LLC’s are actually owned by a single member and structured as pass-through or disregarded tax entities, where all income and loss are reported on a personal tax return. Owners of pass-through LLC’s do not have to be concerned about state tax in LLC level whether LLC is in Wyoming or not.
However, if your LLC is taxed as a corporation rather than a pass-through entity, you will pay both federal and state corporate taxes. But even in this case, corporations and LLC’s taxed as corporations do not pay state tax in Wyoming.
Some states, like California, require informational tax returns for all LLC’s, including disregarded single-member LLC’s. Wyoming does not require this.
Wyoming’s business-friendly tax system and lack of income tax makes it easy to run a business with Wyoming LLC.
2. Minimal paperwork and fees are required to form and maintain an LLC
Wyoming business entities, including LLC’s, can be formed very quickly by filing the paperwork with the Secretary of State. The $100 filing fee is one of the lowest in the country.
Even though it is always recommended for an LLC to have an operating agreement, Wyoming does not require LLC’s to have them, as other states do. This means a new business can get off the ground fast by registering an LLC in Wyoming and take the time to work on an operating agreement.
All you need to do to maintain an LLC in Wyoming is to file an annual report confirming the LLC’s name, registered agent and addresses each year. The annual fee, called the Annual Report License Tax, is typically $50 for LLC’s with assets under $250,000 in Wyoming, and $0.0002 per dollar of business assets over $250,000 located in Wyoming.
The fee to maintain a Wyoming LLC is significantly lower than in other states, such as Nevada ($350 annually), California ($800 annual franchise tax) and Delaware ($300 annual franchise tax).
3. Wyoming LLC offers enhanced protection from business liability for individual members
Many business owners choose to run their business through a corporation or LLC because “the corporate veil” protects the owners from the liabilities associated with their business’s activities. This protection provided by the law has encouraged people to enter into business without worrying about risking their personal assets. In fact, the main purpose of LLC Acts in states was to provide to owners limited liability and separation of entities without requiring onerous corporate formalities.
However, in certain cases, state laws allow piercing the corporate veil to hold the owners of a corporation or LLC liable for business debts. The standard for successfully piercing the veil can be stricter in some states than others, and Wyoming has one of the strictest standards.
In 2016, the state amended its LLC Act to make it even more difficult to pierce the LLC veil. With the new act, failure to observe company formalities cannot be a reason to find owner liability, standing alone. There must be a combination with other factors listed in the act. Also, the fact that the LLC is a disregarded or pass-through entity cannot be considered in the analysis, providing the same strong protection to the single member LLC.
One thing you have to pay attention to when your primary business or personal residence is not in Wyoming is that the court might not apply Wyoming law. Even if the LLC is formed in Wyoming and its law is chosen as a controlling law in a contract, judges in multistate cases have a lot of discretion as to which state’s laws apply. They often favor the law where the lawsuit is filed, unless a party can show that another state’s laws have greater interests in the case.
However, in piercing the corporate or LLC veil cases, the choice of law is well established around the country to apply the law of the state where the entity is formed, instead of the state where the court sits. Therefore, when you form an LLC in Wyoming, you can be assured that Wyoming laws will apply, and business creditors will have a difficult time finding you personally liable for business debts.
4. Wyoming has the most protective charging order laws: Your LLC assets are safe from personal liabilities, even if you are the sole owner of the LLC
A unique feature of LLC entities is that creditors of LLC members are not allowed to satisfy personal obligations directly from LLC assets. In many states, they can only use a method called charging order to place a lien on distributions, which may or may not come. When a charging order is the exclusive remedy for creditors to reach assets in an LLC, the business is protected from creditors’ attempts to interfere with the business activities after taking over the debtor-member’s place.
However, the strength of this charging order protection against personal creditors varies among states. In California and Colorado, personal creditors can force the sale of the LLC’s assets based on the lien placed by the charging order. In states with strong charging order protection, such as Nevada and Wyoming, creditors cannot force the sale of the LLC’s assets, and must wait for distributions.
Even in states that offer the charging order protection as an exclusive remedy, the same protection is not available to single member LLC’s, because the protection was originally developed to protect other members of LLC’s, and single member LLC’s do not have partner members to protect.
Along with Nevada and Delaware, Wyoming is one of the few states that offers the same charging order protection to single member LLC’s.
5. A Domestic Asset Protection Trust can be combined with a Wyoming LLC to provide even stronger asset protection
Wyoming is one of 16 states that allows domestic asset protection trusts. In these states, you can protect your assets against future creditors by relinquishing ownership to the trustee of an irrevocable asset protection trust. You can still access the assets as a beneficiary of the trust.
A Wyoming Domestic Asset Protection Trust can provide another barrier of protection for your LLC against personal creditors. The creditors cannot pursue the business to satisfy personal obligations, because it is no longer owned by you.
Another way to use an LLC with a Wyoming asset protection trust is to set up a private trust company using an LLC. An asset protection trust should have a third-party trustee who manages the trust assets. Wyoming is one of a handful of states where you can form a private trust company to manage an asset protection trust. Instead of giving all the control of your assets to a professional trustee who often charges high fees, you can maintain indirect control as a manager of a private trust company.
6. You can remain anonymous with a Wyoming LLC
Some business owners do not want their identities or personal information easily available in public records. Wyoming does not require LLC’s to list managers or members in the public record, so your name is not required there. Furthermore, annual reports require the name of only one person. If you use an agent to file an annual report, the agent can sign the report, and your name will remain off the public report.
Delaware and New Mexico have similar privacy protection.
7. A Wyoming LLC can be owned by a non-US corporation to facilitate US transactions
Many expat business owners and digital nomads choose to run their businesses through non-US corporations, in order to reduce tax liabilities. However, using a non-US corporation alone can be challenging if a business requires a US bank account, or if it must transact with US-based customers.
One solution to this problem is to have a US LLC subsidiary under the non-US corporation. You will still have the tax savings for your wholly offshore business entity, but you can easily open a bank account and a merchant account with a US entity.
A Wyoming LLC is often used in this structure because of the ease of forming and maintaining the LLC, and the strong asset protection.
Issues to consider before forming a Wyoming LLC:
You need to register to do business in a state that has a business nexus
If you conduct business activities in a state other than Wyoming, you might have to register to do business as a foreign (out-of-state) entity in the state. Each state has different standards as to what kind of business activities require registration.
Registering as a foreign entity in a non-Wyoming state means you might have to pay annual fees and state taxes in the state. For companies with business activities in one or more states, you will not save taxes or fees by forming a Wyoming LLC, and there will be the added expense of registering in other states.
You might have less asset protection with non-Wyoming state laws under conflicts of law principles
As we discussed earlier, which state law applies in a legal dispute can be uncertain when there are multiple states involved. The state of formation is not always the default state law that applies in legal disputes.
Therefore, if your business was incorporated in Wyoming, but has a presence in another state, you might not have all the protections of Wyoming LLC statutes available to you.
You need a well-drafted operating agreement to get the full benefits of asset protection in Wyoming
Even though an operating agreement is not required to form an LLC in Wyoming, it is a critical element of asset protection. Forming an LLC itself does not provide enough separation between the entity and the individual owner. The business procedures and formalities documented in an operating agreement provide evidence of separation, and enhance the asset protection of the LLC.
A Wyoming LLC offers many benefits for business owners looking for strong asset protection and cost efficiency. It is especially a great option to consider for small business owners who want the same protection as bigger companies.
A final decision on a business structure should always be based on your specific situation. It will serve you in the long term to speak with your lawyer and examine your situation thoroughly.
Speak with a Business Lawyer at Jiah Kim & Associates
If you own a business and would like more information about protecting your business assets, contact Jiah Kim & Associates to arrange an initial consultation. You can call us from anywhere in the world at (646) 389-5065, or contact us online and we will be happy to work with you on your schedule.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.