Forming an LLC in Wyoming – is this really a smart strategy?
Lately, I've been talking to a lot of people that are completely convinced that forming an LLC in Wyoming (or Nevada) is a great strategy for their e-commerce business.
Related: What is the Best State for Form an LLC?
I'm baffled by this. But here are a couple examples of comments I've come across on this issue…
“I was advised to use Wyoming LLCs, which are then owned by New Mexico LLCs. The reason being- Wyoming offers (supposedly) the best asset/owner protection in the US, and in New Mexico, there is no requirement to disclose the beneficial owners of the LLC. So with this combo, you have good asset protection and anonymity.”
“I'm considering “moving” my company to Wyoming. I recently moved out of the original state that I started my company in (Iowa) to Wisconsin, and figure I might as well move my company to one of the more business-friendly states.”
So there seem to be three primary motivations for people to move their business to Wyoming/Nevada/New Mexico.
- These are considered to be more “business friendly” states.
- In New Mexico, there is no requirement to disclose the beneficial owners of the LLC.
- (Not stated above, but implied) – They can avoid paying state income taxes by forming the LLC in a state with no income tax.
Let me just address these concerns one at a time. (And FYI, an LLC isn't always the best business entity. Here is an article I wrote comparing LLC's and S-Corp's).
Argument #1 – Wyoming and Nevada are more “business friendly” states
What does “business friendly” even mean? Yes, there are some states that are easier to do business in than others. And yes, some states have laws that may be more friendly to your business in the event you get sued. However, there are two problems with this argument.
First, it is highly unlikely that you are going to ever get sued, and even if you did, do you really want to defend a lawsuit in Nevada or Wyoming rather than where you actually “live” just because you think the state might have laws that are more favorable to your business?
When you think about it, it really doesn't make sense. Many states are business friendly, these days because they are looking to attract business to their states.
Argument #2 – No Requirement to Disclose the Beneficial Owners of an LLC in New Mexico
I'm not an attorney in New Mexico, so I can't give advice on New Mexico law. But let's assume this claim is correct. I'm not sure how this benefits you if you are operating your e-commerce business out of North Carolina or Florida (the two states that I AM licensed to practice law in).
So if someone goes online to look up your business, they won't be able to determine that you are the owner of the business. That's fine and good. But there are lots of legal strategies that can be used to keep anonymity regarding the owner of a business. Unless you are a resident of and doing business solely in New Mexico, I don't believe this is a good reason in and of itself to form your LLC in New Mexico.
Argument #3 – You Can Avoid Paying Income Taxes By Forming an LLC in Wyoming or another State With No Income Tax
Oh boy… This argument is really making me tired since I've addressed it so many times. I'm not sure where this “urban myth” came about that says by forming an LLC in a state with no income tax, you won't have to pay income tax in the state that you live.
You receive the benefit of not paying a state income tax only to the benefit that you live and operate your business in a state that doesn't have an income tax!
Here's the thing about LLC's. If you own one, you have to report the income from the LLC on your 1040, or alternatively, you have to file a separate federal tax return for the LLC and list yourself as an owner, whereby the income flows through to you anyway.
So if you live in a state that charges an income tax, you will be forced to disclose and pay that income tax, regardless of which state you formed the business in!
Not only that, but if you are “doing business in” your home state, you are still required to register your Wyoming or Nevada or New Mexico LLC in the state that you live in as a “foreign corporation”. So now, not only are you not receiving any tax benefit from forming the LLC in a state with no income tax, but you are also subjecting yourself to duplicative filing fees, tax returns, annual reporting requirements, etc.
So what's the bottom line here?
Only form your LLC in Wyoming or Nevada if that is where you actually live and are doing business. If you live in another state (regardless of whether there is an income tax there or not), then you should form your LLC or corporation there. If you will be living and doing business in multiple states, then talk to a lawyer or tax advisor about where it makes the most sense to file.
EXCEPTION: If you are a foreigner living and operating your business abroad, I have written an entire post on what you need to do.