Previously, I have written about the advantages and disadvantages of incorporating in Delaware or Nevada as a small business owner. With regards to Delaware, my conclusion was that, for most small companies, the disadvantages outweigh any advantages. With regards to Nevada, my view was that it is highly uncertain that many of the advertised benefits of incorporation in Nevada, such as greater asset protection and greater liability protection, would actually materialize. In this piece, I’ll cover my thoughts on another state that is frequently pitched as a good place for forming your business: Wyoming.
Wyoming limited liability companies are heavily marketed on the internet as a great option to form a new business. Wyoming has the distinction of being the first state to have a limited liability company statute, which apparently was created as special interest legislation for an oil company. Because of Wyoming’s long history with LLCs, Wyoming LLCs are highly promoted as being superior to the LLCs of other states (usually by companies that offer to do the formation for you…for a fee). The fact that Wyoming was the first state to have an LLC statute doesn’t really benefit a business owner, of course. The three major substantive selling points that are used to promote Wyoming LLCs are: (1) superior asset protection, (2) lower taxes, and (3) lower fees. For the reasons described below, it is highly unlikely that a business owner would actually realize any of these benefits if they were to organize their business as a Wyoming LLC.
The first major substantive selling point is that Wyoming LLCs supposedly have superior asset protections. Wyoming law provides that the sole remedy available to creditors of owners of LLCs is a charging order. A charging order is an order by the court directed to the company ordering the company to send all distributions that would have gone to the owner/debtor to the judgment holder instead. This limitation can make it more difficult for a creditor to collect on their judgment because the creditor will not be able to force the debtor to sell his ownership interest in the company. Usually, after a creditor obtains a judgment against a debtor, the creditor is entitled to sell the debtor’s personal property to satisfy that judgment. However, if the creditor’s sole remedy is a charging order, then the creditor is entitled to whatever distributions are produced from the ownership interest (if any at all), but the creditor cannot transfer or sell that ownership interest. Having this protection can give a debtor more leverage in negotiating a settlement. However, the charging order limitation is not unique to Wyoming. Most states’ LLC statutes provide that the sole remedy to a creditor of a member is a charging order. It is true that Wyoming has extended the charging order limitation to single member LLCs, whereas many other states do not provide such a protection in the case where an LLC has only one owner. However, it is important to note that if a lawsuit takes place in your home state or in some other state besides Wyoming, conflicts of laws principles may cause the law of a state other than Wyoming to control whether a creditor may be able to obtain a lien on or a forced sale of a debtor’s interest in a Wyoming single member LLC. In other words, judges often have a lot of discretion as to which state’s laws apply in multi-state cases and often begin with the assumption that the law of the forum applies, unless a party can show that another state’s laws have greater contacts or interests in the case. Therefore, you cannot be sure that your own home state won’t go ahead and apply its own law to the situation, notwithstanding whatever Wyoming law states. Therefore, for people interested in asset protection, I’d recommend taking steps other than forming a Wyoming LLC. See my post on Nevada corporations and LLCs for links to more information on what steps your should take for asset protection.
Another major selling point that is used in promoting Wyoming LLCs is that Wyoming has no income tax. Unfortunately, since most LLCs are pass through entities, which pay no taxes themselves, this is of limited benefit. For instance, if you live in another state that has a personal income tax, and form a Wyoming LLC, all the income would be passed through to you and you would still end up paying state income taxes. Therefore, forming an LLC in Wyoming is not an effective tax avoidance method. In addition, if your state does impose an income tax on LLCs at the entity level (which for instance my own state of Tennessee does), and your LLC operates a business in your state, then your LLC would still end up paying the state income tax regardless of Wyoming’s income tax, because it is the entity’s presence in a state which controls whether it is taxed there, not its state of incorporation.
The final major selling point that is used to promote Wyoming LLCs is that the fees to organize them and the ongoing annual fees are lower than other states. This is certainly true. But if you live outside of Wyoming, and organize your business as a Wyoming LLC, your business will almost certainly be doing business in your home state. In that case, your LLC will be required to qualify to do business in your state, which usually involves paying a fee equal to what your company would have paid had it simply been organized in your own home state. Therefore, you are unlikely to realize any cost savings from organizing your LLC in Wyoming (Nevada and Delaware entities present this same issue as well).
As with Delaware and Nevada entities, I don’t think there is much advantage to using a Wyoming LLC, as opposed to an entity formed in your home state (unless of course, your home state is Wyoming). You will end up incurring double the fees, because you will have to pay Wyoming’s fees and then pay your own state’s fees to obtain authorization for your Wyoming LLC to do business in your own state. Despite this additional cost and complication, it is uncertain whether you will see any of the benefits, such as greater asset protection, that are often promised in connection with incorporation in Wyoming, nor are you likely to see any tax savings. In addition, if there were ever litigation among the owners, you may be forced to conduct that litigation in Wyoming, which could end up being highly inconvenient and expensive. Therefore, unless there is some specific reason to set up your company in Wyoming, I’d avoid using a Wyoming LLC.
As always, your final choice in entity selection should be based on your own specific situation. Therefore, before making any final decisions on your form of business, you should speak with your attorney.
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© 2011 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.
I enjoyed your article regarding Wyoming. One thing that I have noticed is that not many people discuss internet companies that do not do business in a particular state. For example an all internet company that solely relies on monthly or yearly membership fees from people around the globe. It seems that this type of company could benefit from a Nevada, Delaware or Wyoming.
Janeiro,
I’m not really following you on your question. Even web companies are still doing business somewhere (even if it’s the state that contains the basement which the founder is working out of). You would not be able to escape paying state taxes that way (well, you could possibly evade them due to lax enforcement, but you would absolutely owe the taxes).
Perhaps I’m missing something in your question.
Alex
Thanks for your insights, Alex. I’m in the process of deiciding which state to set up my LLC. However, my situation is that I am living outside the US full time, and (perhaps similar to Janeiro’s comment) my income will come from all around the globe. In this case, I’m getting closer to the conclusion that I should find the state with the lowest annual fees since I want an LLC entity for the credibility of doing business with other companies. And should I ever move back to the US I can re-register/move the LLC in my home state. Would you agree or are there additional points I should consider? Of course I understand I should consult a personal attorney, but simply want to know the right questions to ask.
Frank, The difference in the annual fees between the states is pretty minor in the scheme of things, so it really isn’t really much of an issue (a few states like California are significantly more expensive). That said, I guess there are no reasons why you shouldn’t consider it as one of your factors. You many also want to explore forming an entity in your country of residence. You may find that to be an easier option, with less international tax issues.
I appreciate the opportunity to make a comment or question. My question: I was told that Wyoming allows the stated business of the LLC can have more than one source. I’m located in Wisconsin and want to have the LLC to be able to have a variety of sources. For example, fees that are charged for professional services, i.e. the administration of a Sec. 105 Medical Expense Reimbursement Plan for “micro-sized” employers. In addition there are fees charged by my spouse for housse cleaning & nanny/baby sitting services. We want these fees to be chanelled into TLC Plan Services, LLC which is a one-member LLC filing a Schedule C for tax purposes. Thanks for your help.
Tom,
I’m not aware of a single state LLC statute that prevents an LLC from having more than one line of business (unless of coure, the owners have agreed to this limitation in their operating agreement or in its articles of formation). So that feature is not in anyway unique to Wyoming.
There are a lot of online companies that make claims about the benefits of an LLC from X state (implying somehow that LLCs from that state have some advantage others don’t). We see this most often with companies offering services to form LLCs in Nevada or Wyoming. While some of these claims may be partially true, they are rarely the whole truth and rarely will you find much advantage to incorporating outside of your state. (There are a number of exceptions, which I talk about in my articles about Delaware, Nevada, and Wyoming).
Hello,
Thank you for the insightful post. We organized as an LLC in Wyoming, and the partners are located in 2 different states, with contributors around the country.
Our business is an internet based blog, where we don’t sell anything. Our earnings are barley $75/month from Google Adsense.
We organized in Wyoming because we thought it was the easiest due to the low organization and renewal costs. Since we are an LLC taxed as a partnership, our state income tax will still pass through and be reported to and taxed by our respective states.
Would each partner still need to file organization documents in each state that a partner resides? We are all 20 something and have no idea where we are going be living 3 months from now. We travel so often that it doesn’t make sense to have articles in each state we live in.
Would organizing in Wyoming not work for our situation? Thank you so much for your time in reading through this.
Caleb,
Each state has its own standard for determining what qualifies as “doing business” within the state; sometimes having an active LLC member within the state would trigger it (CA comes to mind), but other states are more lax. Generally, you should be qualified to do business in the state where the company is run out of. Given the small amount of revenue involved, I don’t think that obtaining qualifications to do business where each partner resides is very cost effective. You should though ask your accountant to make sure your company is complying with all the tax requirements of each state where is has a “nexus.”
Alex
Hi Alex,
Thank you for the informative post. I recently started an internet business, which I run from my home in Nevada. I originally planned on forming a single member LLC here in Nevada, given the tax benefits and my business’s location. However, Nevada requires the publication of one of the LLC’s managers (which would be me) on its Secretary of State website. This is obviously a huge privacy concern. Do you know if Wyoming has a similar requirement? As far as I can tell, this would be the only real difference between Wyoming and Nevada, at least for me. I fortunately get to enjoy the benefit of no state tax either way.
Thanks in advance for your help.
I’m not surety what extent Wyoming will keep information from at least being accessible to the general public (regardless of what appears on their website). One thing you need to keep in mind is that if you are operating a business out of Nevada, the state of Nevada is likely to take the position that you must qualify to do business in Nevada and file all of the same annual reports as a Nevada LLC. I do know that Delaware’s privacy is pretty good for LLCs though the qualification to do business issue is still present.
Which state has a veil to hide the names in the corporation? is that not nevada and wyoming ?
Can an employee who is based in Los Angeles sue a company with a LLC in Wyoming for not submitting W-2 and a 1099? This company’s LLC is formed in Wyoming however, they do business from California.
Also, can they be sued for misclassification of employee if they were hired on as consultants but were really working as employees? How does that affect the tax situation for the employer?
The state of formation is not really relevant to whether could can sue the company. Misclassifying an employee as an independent contractor can result in the employee having a private right of action against the employer. In addition they could be subject to fines and penalties from certain governmental agencies. I’d urge you to consult litigation counsel if you believe you may have a claim.
I have LLC in California . and makes about $100,000 in grosses and nets $15,000 . so i am living in poverty but i still have to $800 in Annul LLC. Tax. over $1,000 for CPA.
my dept are claiming and i am estimating that i will fall soon and i need to protect some of may assets so i will not end up holding signs says work for food or need shelter.
so Can Wyoming help? or any suggestions.
If your business is ran out of California, your LLC owes the $800 tax, regardless of where it is formed. Reorganizing in Wyoming is only going to make it more expensive because you’ll have to pay Wyoming fees as well.
Hi Alex, I am also living outside the US and would like to sell products in the US through the internet. There are fulfillment centers that can store and ship the orders coming in. A US based company can promote their products much easier with online stores like Amazon etc. Is a Wyoming based LLC a good solutions for a scenario like that (no income and sales tax)?
It’s possible. I’d suggest that you consult a US Based accountant for your specific situation as it involves interstate and international sales tax issues.
Hello Alexander,
I would like to start a company that either 1) serves as an agent for export sales or 2) buy US product and export.
Any ideas or suggestions on the best way to do this?
David,
We can’t really give specific legal advice to your situation on a blog post board. If you are planning on doing business in the US, you should retain US legal counsel and an accountant here. That will help you navigate through all of the various issues you’ll deal with, including corporate law and entity issues, tax issues, and export/international trade issues.
Hey,
if I plan on having an online business. not really selling anything in my home state.
Would an wyoming llc make sense for me.
Fyi: I live IL and would sell informational products like ebooks
Generally no. You can’t escape your state’s tax burden simply by forming your entity out of state. If you live in Illinois and operate the business out of your home, it’s an Illinois business for just about every purpose except for internal organizational governance purposes.
I’d recommend you retain an accountant or tax attorney to advise you on the most tax efficient means of setting up your business (which in all likelihood will not involve incorporating out of state).
Hi Alex,
I’ve been looking into forming an LLC (or two) in Wyoming off and on for a couple of months. I currently live in Kansas but will be moving back to Florida in a few months. I’ve recently acquired a domain name, personally built Android and iOS based applications, and filed a utility patent that covers the software aspects of said applications. The business will only have an internet/app store presence.
The only issue I’m concerned about is privacy – specifically separating my name from the business and its assets. This is a concern for me because the domain name and mobile applications directly relate to marijuana and the greater marijuana culture. It would be nice if I can avoid any awkward questions from future employers or medical schools (in the middle of the application process). And it would be even better if the drug cartels, wannabe gang members, and stoners with too much time on their hands didn’t know my name or where I lived.
Is the following scenario possible?
With the use of Registered Agents, I’d create two LLCs – Random Name, LLC and MJ Business, LLC. I’d set it up so that Random Name is the full owner of MJ Business and I’d use MJ Business everywhere on my website, mobile applications, in advertising, and when registering with Apple and Google to sale my applications. As the owner of Random Name (which will own a Wyoming business), I know I’ll have to file as a foreign entity in Florida for tax purposes – this doesn’t bother me.
My big question is: Would I also have to file a FL foreign entity status for MJ Business as well?
I do intend on contacting a business attorney in Wyoming once I have a better picture of what I can and can’t do.
Thank you for your time,
Jason
I have 2 thoughts for you:
1. I think you need a business lawyer in Florida, not Wyoming. The issue is how to maintain your privacy while doing business in Florida. Delaware LLCs also offer a high degree of privacy as well, so this is not a Wyoming issue per se.
2. You should probably refrain from posting detailed information on websites asking for advice. Remember, there is no attorney-client privilege in a public place and no (good) attorney would give legal advice over a public website.
Good luck in your venture.
Dear Alex
I am not an American and living in Europe. I need to form an LLC in Wyoming. But before I start forming I wished I confirmed an LLC’s (or my) possible tax duties in connection with the IRS or Dep. of State to set up things right from the very beginning.
My target for this moment is just to form an LLC in Wyoming, keep it active but run and manage the business outside the US, which seems to be the clue.
I surfed a lot on the Internet looking for a proper information and I found the following one:
“In case an LLC generates revenues exclusively outside the United States, and the sole owner is non a US resident for US tax purposes, the tax pass through nature of an LLC means in practice that an LLC does not pay any federal income tax in the United States.”
Simultaneously, I found some opinions of the CPAs that do not confirm the above or at least are ambigous, so my first question is if you can help or advice on it?
Moreover, what about the EIN or ITIN? Do I have to apply for them if I plan neither operate nor employ in the US?
And how about filing a return, minutes of meetings, book-keeping, recirds, etc? Am I obliged to do all these?
Thank you from advance
If you set up an entity in the US you will have a number of filing, tax, and other administrative duties, including but not limited to the ones you mentioned. I do recommend that you have US counsel and an accountant to help you with these.
If retained, my firm can advise you on some of these items (those to do with entity formation). Tax issues would require a CPA. We don’t answer specific legal questions on a public blog comments section. If you are interested, please contact me via email at the link provided on this blog.
Alex, this is what I received meanwile from one of Wyoming’s tax lawyers. This is quite opposite to what you claim. I’m a bit confused now. Can you please help me understand?
“A single-member LLC is considered a “pass through entity” which means that its income passes through and is reported by and taxes paid by the single owner. Because you are a foreign person, you only pay US tax on US source income. So long as the LLC has no US source income and you remain a non-resident, non-citizen of the US, the income of the LLC will not be taxable by the US. Because no tax filing will need to be made, there will be no need for you to get an ITIN or for the LLC to get an EIN”
I can’t give people individualized legal advice on an online blog post. Generally there are administrative and tax requirements that apply to US entities, though some of them may not apply to certain limited circumstances.
My main piece of advice remains that you need to retain a tax advisor (either a CPA or tax attorney) if you are planning to have an entity in the US or are planning to do business in the US.
It sounds like you’ve done that and if after describing your situation in detail, he has advised you that you will not be required to do some of the items you described, then certainly follow that advice.
hellO, I am in California, I have my wyoming llc, and planning to open another LLC here in California, since I have my wyoming llc already, how do you see naming my wyoming llc as the manager or member? this new llc will be manager managed. Basically, what I want is my name not be be public on secretary website or in the articles. Suggestions are welcome, how can I merge these 2 llc with wyoming being the manager or member, thanks?
Kris,
We can’t really give specific legal advice to your situation on a blog post board.
I can tell you generally that an LLC an be the manager of another LLC. In order to figure out how to best may to execute what you are doing, I’d recommend hiring California counsel.
When it comes to setting up LLC’s, S-Corp, C-Corp, always deal with CPA’s or ACCOUNTANTS as attorneys generally do NOT understand anything about compliance ($$$$) that your company will pay on a federal/state/local/international level.
My attorney didn’t even understand international tax treaties (exemption/credits) which my accountant talked to me in layman’s term.
This entire subject is an accountant’s field at half the cost of an attorney. I will keep my attorney for real estate closings. For else else, my accountant has been priceless (at half the price).