Why You Shouldn’t Form an LLC in Wyoming?

When you’re starting a business, you’ll want to receive all the advantages you can get. That’s especially when it comes to business fees and taxes.

It’s for that reason that some people become excited when they learn about how the state of Wyoming doesn’t set any sort of corporate or gross receipts income tax at all. Your business can earn money without the state taking its share.

When some people learn about this, it’s natural that some of them may think that it’s a good idea to form some sort of LLC (limited liability corporation) in the state. After all, an LLC protects a business—if there’s some sort of business trouble with your LLC, your creditors can’t go after your personal bank account. The lack of corporate income tax is icing on the cake.

Wyoming and South Dakota are the only states that don’t have any corporate or gross receipts income tax on local business. Compare this to a state like New Jersey, which levies a corporate tax rate of 11.5 percent. Pennsylvania sets a corporate tax rate of 9.9% while it’s 9.8% for both Minnesota and Iowa.

But it’s not that simple. There’s a slim chance that an LLC in Wyoming works for you, if you live and do business in the state. But if you’re based somewhere else, then it’s not right for you.

A Hypothetical Example

Let’s say you’re living in Iowa, and you decide to launch an online business from your house there. Then you read about the lack of Wyoming corporate tax, and you decide to form an LLC in Wyoming.

But your business is based in Iowa, and right there you have a problem. It’s one thing to form your LLC in Iowa, since you’re based in Iowa. That means you have a Domestic LLC. Then, if you plan on having that LLC do business in Wyoming with that LLC, then you can register that LLC in Wyoming. That makes your LLC a foreign LLC. You can register your LLC in every state (aside from Iowa) where you plan on doing business.

Since your LLC was formed in Wyoming and you continue to do business in Iowa—you’re doing business illegally. That will result in fines and other penalties for your business. Since you have a Wyoming LLC and you’re operating in Iowa, that means you need to register that LLC in Iowa as a Foreign LLC.

Defining “Doing Business”

Before we continue, let’s clarify on what we mean when we say that you’re “doing business” in a state, whether it’s in Iowa or Wyoming. The term “doing business” is actually more about where you’re running your online business. It’s not really about where you get your customers and clients.

That means you don’t have to register your online business in every state where you your customers are based. Let’s say you operate an online selling business, and you have customers from all over the US. That doesn’t mean you need to register your LLC in all those states where your customers are.

It’s not about where your customers are based. It’s about where your online business is based.

Court Jurisdiction

Maybe you think that by forming your LLC in Wyoming, you may enjoy certain legal benefits (aside from the corporate tax thing). Maybe Wyoming has more permissive laws regarding your business, compared to Iowa laws. If your LLC is hit with a lawsuit, maybe you think you have a greater chance of winning with Wyoming laws.

But the courts will determine which laws apply, and in this case the Wyoming laws may not be relevant. The courts will most likely decide that Iowa laws will apply for the lawsuit, since your LLC is based in Iowa to begin with.

Consequences of Registering the LLC in Both Wyoming and Iowa

Right away, you can realize just how much trouble and hassle you have to deal with. now that you have 2 LLC filings to maintain.

  • First of all, that means you have paid the state filing fee for Wyoming first, and then you paid for the state filing fee in Iowa.

  • Each LLC filings will require registered agent services, and you’ll have to pay for each LLC every year.

  • You also have to meet annual requirements (including fees) to maintain that LLC in both states.

It’s a lot of trouble especially, when you’re not doing business in Wyoming! You should have just formed your LLC in Iowa in the first place, as that’s where you’re based and operating. Then, if you expand and do business in Wyoming, you can then register your LLC there in Wyoming.

You don’t really enjoy any sort of advantage with the domestic LLC registration in Wyoming. Instead, you risked penalties and fines. Even if you manage to fix the problem, the overall scenario is a lot more complicated than it should have been.

Moving the LLC from Wyoming to Iowa

Let’s say that you came to your senses, and realized that if your business is based in Iowa, you need to base that LLC in Iowa as well. The problem is that it’s not as simple as you might have hoped, to move your LLC from Wyoming to Iowa. It’s a bureaucratic mess, with so many steps and lots of paperwork involved.

Then you’d have to close that bank account you opened in Wyoming (which you had to do, to register your LLC in Wyoming in the first place). You then have to open a new business bank account in Iowa. You’d have to redraft your corporate paper work. Have to update all your suppliers and vendors, since your old agreements may no longer apply with your redomestication filing. The IRS must also be notified.

Conclusion

The advice of not forming an LLC in Wyoming doesn’t apply to you, if you don’t live in Wyoming or do business in the state. That’s true for the vast majority of people in the US. Never mind how there’s no corporate tax in Wyoming—if you neither live or do business there, that lack of corporate tax doesn’t matter to you at all!

So, if you’re launching a business and you wish to protect your personal assets, an LLC is a good idea. But you should register and file that LLC in your home state. It’s that simple. Once you’re done with that, then you can do business with customers from all over the US. That includes customers and buyers from Wyoming.

It’s just that the Wyoming business laws won’t apply to your business, if you’re based in another state. You won’t get to enjoy that nice lack of corporate tax in Wyoming. The only way that would matter is if you are actually in Wyoming in the first place. If that’s the case, then the LLC in Wyoming makes a lot more sense. Relocating to Wyoming may be an option, if you’re willing. But you’re probably better off just registering your LLC in whichever state you are.

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