Why You Shouldn't Form an LLC in Wyoming

Although you may have read differently, most people should not be forming an LLC in Wyoming.

In order to best explain the reasons, let’s look at an example:

Steven is a resident of California who runs an online business from his home in Wyoming. He reads online that, “California is the best state to form an LLC,” so he forms an LLC in California.

Let’s discuss the issues that will arise in this situation, including:

• Domestic LLCs vs. Foreign LLCs
• Illegally doing business
• Legal jurisdiction
• Wyoming LLCs aren’t as cheap as people think
• The headache

What is a Domestic LLC vs. Foreign LLC?

If you form an LLC in your home state, this is called a “Domestic LLC“. Meaning, the LLC is domestic to that jurisdiction.

If you want this Domestic LLC to do business in another state (a different jurisdiction), you must register that LLC in the new state. Once that LLC is registered in the new state, it is known in the new state as a “Foreign LLC“.

It’s technically just 1 LLC doing business in 2 different states.

The LLC originally has authority to do business in its home state, since that’s where the Domestic LLC was formed. And then it must file as a Foreign LLC in every state it wishes to do business.

So in our example, Steven has only formed a Domestic LLC in Wyoming.

Tip: If you’re interested in expanding your business to multiple states, we’ll explain more about the difference between domestic vs foreign LLCs.

Your Wyoming LLC may be illegally doing business

Since Steven is running his business from his home in California, his Wyoming LLC is illegally doing business in California.

In order to avoid fines and penalties, he must register his Wyoming LLC as a Foreign LLC in California.

What counts as “doing business”?

Pro Tip: “Doing business” has more to do with where you are running and operating things from instead of where your clients and customers are located.

A lot of our readers ask us if they have to register their LLC in every state where their customers are located. No, you don’t have to. You can just form your LLC from wherever you are running the business.

Even if Steven has no employees in California, no office in California, and no clients in California, he is still running the business from his home in California.

Furthermore, California not only has strict corporate laws around doing business in the state, but they also have strict taxation laws.

This means that in addition to the LLC costs in Wyoming and California, Steven may receive fines and penalties from both the California Secretary of State and the California Franchise Tax Board.

And he’ll end up paying California LLC annual fees and taxes anyway (which may have been the reason he considered a Wyoming LLC in the first place).

In order to avoid fines and penalties, he must register his Wyoming LLC as a Foreign LLC in California.

Foreign LLC Registration

In order to remedy the fact that Steven’s Wyoming LLC is illegally transacting business in California, he’ll need to register his Wyoming LLC as a Foreign LLC in California.

This means he now:

• has 2 LLC filings to maintain (a Domestic Wyoming LLC and a Foreign California LLC)
• has 2 state filing fees
• has to meet annual requirements and fees in 2 states
• may have increased Registered Agent fees

So in hopes of obtaining certain Wyoming LLC benefits, Steven has instead complicated the situation, increased his fees, and will most likely get no benefits from a Wyoming LLC.

The court has discretion about legal jurisdiction

If Steven was looking to obtain certain legal benefits by having a Wyoming LLC, those benefits may not apply in a court of law.

If Steven’s Wyoming LLC is involved in a lawsuit, the courts have discretion on which state laws apply.

Since Steven is doing business in California, it’s possible that the courts may decide that Wyoming law doesn’t apply and that California law applies instead.

So the legal benefits of the Wyoming LLC are now useless.

Wyoming LLCs aren’t as cheap as people think

A lot of people hear that Wyoming is a good state to start a business because they don’t have corporate income tax.

That information is very misleading, and most often ends in business owners owing more money than they would have by forming their LLC where they live and/or do business.

What about Wyoming not having corporate income tax?

A lot of people get really excited when they hear that “Wyoming has no corporate income tax!”

Unless your LLC is taxed as a C-Corp, this won’t even apply. And this is the case for 99% of our readers.

Said another way, most LLCs don’t pay corporate taxes since LLCs are pass-through entities.

Meaning, in their default tax classification, LLCs already don’t pay corporate income taxes. The profits from the LLC “flow through” to the owner’s personal income tax return and are paid on the individual level (not the entity level).

So the fact that Wyoming doesn’t have state corporate income tax doesn’t matter.

Furthermore, you pay state income taxes where the money is made. Not where the LLC is formed.

Taxes are paid where the money is made

Even if there are applicable tax advantages in Wyoming, this won’t apply if you’re doing business in your home state.

State income taxes are paid where the money is made. So in Steven’s case, he would get no tax advantages whatsoever by having an LLC in Wyoming and instead, he’d be paying all his state income taxes in California.

What’s worse, is that the Wyoming Department of Revenue may require an informational return to be filed. This means additional costs for Steven’s accountant to file a “zeroed-out” return in Wyoming and apportion the LLC’s earnings to California.

The headache

Although the money may not be a huge deal for some people, the headache can be quite overwhelming for others.

We hear all kinds of horror/frustration stories about LLCs being set up in the wrong state.

We recently heard from a real estate developer, who after acquired land and built a subdivision. Afterwards they found out they shouldn’t have formed their LLC in Nevada, and wanted to move the LLC to their home state.

Then, they were pretty much “frozen” in a state of inaction when they realized how complex a conversion/re-domestication filing was (moving an LLC from one state to another). Not to mention the need to close a bank account, open a new one, draft internal agreements, re-register their new LLC with vendors and suppliers, update the IRS, and more.

The time and opportunity cost was well into the tens of thousands of dollars.

Takeaway

Save yourself the money and the headache.

Just form your LLC in your home state or the state where you’re actually doing business.

Why You Shouldn’t Form an LLC in Wyoming FAQs

Matt Horwitz

Founder & Educator, LLC University®

Matt Horwitz is the leading expert on LLC education, and has been teaching for 15 years. He founded LLC University in 2010 after realizing people needed simple and actionable instructions to start an LLC. He's cited by Entrepreneur Magazine, Yahoo Finance, and the US Chamber of Commerce, and was featured by CNBC and InventRight.
 
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.