If you’re looking for the best lawsuit protection for a new business, you’ve probably run across websites promoting different state LLCs (limited liability companies). Wyoming is probably the most popular. Also in contention is Alaska, Delaware, and Nevada (amongst others). Keep reading to learn why I call this the Wyoming LLC Scam.
Are there really any advantages to a Wyoming LLC?
Here are the claimed advantages to a Wyoming LLC:
Low annual fees.
Unless you live in Wyoming, you need to pay $49/year for a company or law firm to serve as the Registered Agent. Then the state of Wyoming gets an additional $50 for the Annual Report to the Wyoming Secretary of State.
Not that $99 is the end of the world. But it’s not necessary. For example, we don’t charge for serving as registered agent. (We aren’t along in this, by the way. Plenty of other law firms also won’t charge each year.) And the State of Arizona doesn’t require Annual Reports or annual fees. CONCLUSION: $99/year may be low. But FREE is lower. You can form your LLC in Arizona and not have to pay an annual fee.
Wyoming allows the members and managers of LLCs to remain private. Only the law firm you use will know who forms and owns the LLC. This information is protected by attorney-client privilege.
However, if you are ever sued, and the other party gets a judgment against you, the attorney suing you will send you a formal request for information. That request will include a demand that you list any and all business entities in which you have any ownership or control. You will then have to choose between honestly disclosing the fact that you own a Wyoming LLC, or committing perjury.
By the way, in many states (including Arizona) you can list your revocable trust as the owner of your LLC. So as long as you don’t include your name in the name of the trust, you get anonymity this way. (What I mean is don’t call your trust the Betty Lou Smith Trust. Rather, call it the BLS Trust.)
CONCLUSION: This anonymity factor is over-hyped. You can get anonymity by merely being smart in many states other than Wyoming.
Wyoming companies have no state tax returns to file. But Arizona is the same.
Beyond this benefit, limited liability companies in general have the most flexibility in determining how they will be taxed. They are taxed as pass through entities by default, but can choose corporate taxation as well if desired. But none of this has anything to do with whether the LLC is filed in Wyoming.
CONCLUSION: Wyoming is not alone in not charging taxes for its LLCs. Arizona and other states also do not charge a tax on LLCs. However, Wyoming DOES charge a $50 Annual Report fee. That’s a required payment to the State of Wyoming. In my book, that’s a tax.
Wyoming LLCs offer the traditional corporate veil which protects personal assets from business creditors. They also offer charging order protection, even for Single-Member LLCs, which protects business assets from personal creditors. Of course, many other states (including Arizona) also provide this protection.
But you won’t get this same protection if you don’t live in Wyoming!
This is why I say Wyoming LLCs are a scam. (The same applies to Alaska LLCs, Nevada LLCs, etc.) THEY DON’T WORK (unless you live in the state of formation). For many years, asset protection planners have believed and promoted the idea that an out-of-state resident could take advantage of the strong charging order laws in another state by filing their LLC in another state (such as Wyoming). Recent cases show that this does not work.
In American Institutional Partners, LLC v. Fairstar Resources, Ltd., 2011 WL 1230074 (D.Del., Mar. 31, 2011), a Utah resident established several Delaware LLCs with the hope that they could take advantage of the better charging order statute in the State of Delaware. When the Utah resident was sued in a state court in Utah, the Utah court stated “that Utah law applies to all execution proceedings in this matter, including the foreclosure of a member’s interest in a limited liability [company], whether such company is domestic or foreign.” In other words, the Utah court used their own law and ignored the law of the state where the LLC was filed.
CONCLUSION: This means that you should not believe people who heavily advertise the use of a Wyoming LLC for asset protection purposes. If you are sued in a state outside of Wyoming, the court will probably use their own law and you won’t get the benefits of a Wyoming LLC.
What You Should Do:
I call the Wyoming LLC a scam because it’s basically a way to promote law firms and other companies in Wyoming by selling an overly hyped business entity. Also, it’s a way for the State of Wyoming to get more revenue. And you don’t really get that much in return. So here’s what you should do.
- If your state has charging order protection and low (or no) annual fees/taxes, just form your LLC in your state.
- If your state doesn’t have charging order protection, then any of the states that offer those features will work for you. BUT THIS IS IMPORTANT: Since your state’s court will probably just apply your state’s laws, your LLC will probably not have the protection you hope for. In that case, have your LLC owned by another protective entity so that it is not an asset of yours. For example, unless it’s taxed as an S Corp, you can have it owned by a limited partnership. And you can then own a small percentage (such as 1%) of that limited partnership. The other 99% can be owned by something like an Asset Vault Trust.
Legal blah, blah, blah.
The information in this post is general in nature and is not intended as legal advice. If you have a legal question, you should talk to an attorney. Of course, we are happy if you contact us. We’ll help you if we can. If we can’t, we’ll try to direct you in the right direct. However, we are not your attorney until you sign a Letter of Engagement and pay us the agreed fee.