Types of Business Entities
It’s ideal to start this review with a disclaimer as I’m neither an Attorney, Enrolled Agent, nor a Certified Public Accountant. This review is based on my own previous experience that I got from operating and owning several businesses during the last 40 years.
Limited Liability Company (LLC):
The LLC is a separate, distinct legal entity just like a corporation. Wyoming enacted the first LLC law back in 1977. Even though other States followed Wyoming’s lead and enacted their own LLC legislation, LLCs were not widely recognized and acknowledged until the IRS finally ruled on the LLC’s tax status in 1988. Since then, the LLC’s became increasingly popular such that now more LLC’s are being formed than corporations on an annual basis.
LLC’s are not as popular as Corporations which means they aren’t a good choice for you if you intend to grow your business such that you will later on be able to start attracting co-owners.
A lot of uniformed people form LLCs in their home State thinking this will save them money. However, if their LLC fees are higher than average, then it’s better to form your LLC in tax free Wyoming.
LLCs are not separate taxpaying entities as are Corporations. Profits and losses are passed through to the owners of the LLC and the owners are taxed on their personal income tax return. If the LLC has only one member it can be taxed as a sole proprietor or a partnership.
In Wyoming, you can form an LLC with only a single member. To set up an LLC in Wyoming, you only have to complete the Articles of Organization and pay the Filing Fee.
An Operating Agreement is usually drawn up like in a partnership. In addition, it states the duties and obligations of the members. It also articulates how the LLC should be managed and how profits are to be divided.
LLC’s do not usually have a perpetual existence which means you have to put a dissolution date in your Articles of Organization that is usually 30 years.
Unlike with Corporations, record keeping is not really a requirement for LLC’s. You are flexible to divide the assets of the business in case the LLC is dissolved.
There are two specialized LLCs that are available in Wyoming. Series and Restricted.
Series Limited Liability Company:
This LLC types is comparable to a Corporation running several subsidiaries. It’s a master LLC with a lot of divisions.
The reason a lot of people form LLC’s is to protect their personal assets from a lawsuit relating to their real estate holdings and business operations. Forming and maintaining a separate LLC to hold each property or part of operations can save you from legal liability. If an LLC is formed, only the properties under the LLC will be liable to legal judgement.
You could form a series LLC. A Series LLC is only required to pay the filing fee and files one income tax return each year, as long as each series member is also a founding member of the LLC. When non-founding members are added to a newly created division within the Series LLC, that new division should file a separate partnership tax return for that division.
Furthermore, liability incurred by one division does not put in danger assets titled in other subsidiary divisions of the same Series LLC.
Overall, this procedure for adding and is uncomplicated. Additional Series can be added by simply amending the Series’ “Limited Liability Company Agreement” (equivalent to an Operating Agreement for other LLCs).
Restricted Limited Liability Company:
A Restricted Limited Liability Company is a special entity that is allowed Wyoming law. Wyoming is the first state in the US to allow this type of entity. The entity capitalized on Treas. Reg. §25.2704-2(b) stating that a restriction which is less restrictive than those that would apply under state law will be disregarded in valuing the interest for transfer tax purposes under IRC §2704(b). A restricted LLC is complicated to setup yourself which is why I won’t delve deep into detail.
A Corporation is a separate legal business entity with a tax status that is separate from its owners. The existence of a Corporation is perpetual.
The corporate creditors cannot attach the shareholders non business assets.
To file Articles of Incorporation, you have to start by visiting the office of the Wyoming Secretary of State. For a corporation, a minimum of two meeting should be held each year. One for shareholders and the other for directors. Usually, these are done on the same day, a few minutes apart.
Shareholders have to elect a board of directors to run the business for them. A business can have a single shareholder and a single director.
A corporation is taxed just like a person. Taxes are paid after the business has paid all its expenses. Taxes can be minimized by paying the owners a salary, which is a legitimate business expense and is tax deductible. The Corporation pays taxes only on its profits and the shareholders pay taxes on received dividends. The shareholders can’t claim a loss on their tax dividends.
One advantage offered by a Corporation is the option to transfer or sell shares. In case a shareholder dies, a corporation would still be existent. If a company has plans to trade publicly, a corporation would still be the best option.
The S Corporation comes with a special tax designation that enables the income and expenses of the corporation to be ignored at corporation level so that the shareholders pay taxes on the net income earned and claim all losses of the Corporation on their personal income tax returns. Similarly to the C Corporations, owners could be paid a salary to minimize costs.
For S corporations, the number of shareholders mustn’t be more than 75 and they all have to be US citizens. The fiscal year for S Corporations must end on the 31st of December. Record keeping requirements are minimal but have to be maintained nevertheless.
In partnerships and LLCs, you have flexibility in how such items are allocated as long you are not doing it to avoid paying taxes.
If we found an S Corporation, you and I could have a partnership or an LLC where we each put in 50% of the capital. However, we can agree to allocate income 80% / 20% because you work full time for the business and I only part time.
In an S corporation, payroll rules must be followed is the owner is to take a salary. If a partner takes payment for his services, he does so as a draw and thus avoid payroll reporting requirements.
Charging Order Protection:
In case a lawsuit is filed against a member of an LLC personally, judgment can only be satisfied by a Charging Orders which is placing a lien on their percentage of distribution from the LLC. In any case, the courts can’t force an LLC to liquidate its assets to satisfy a judgement.
When they put a Charging order against your LLC, they will be responsible for the taxes on those earnings regardless of whether you have distributions or not which is why a lot of attorneys cannot place charging orders.
In Wyoming, charging orders also apply to small corporations.
Non Profit Corporations are tax exempt.
This is the most ideal corporation that works for doctors, dentists, attorneys, engineers. These professionals require a professional license.
If your business is a one man band, then going for the sole proprietorship is the best thing to do. In a sole proprietorship, if the proprietor dies, the business immediately seizes to exist and all assets will go to heirs. Setting up a sole proprietorship is easy which is the main advantage of why this should be done.
In a sole proprietorship, all business and personal assets are at risk. If the owner owes creditors, creditors can come after both the owners business and personal assets including their savings.
A partnership, according to US Civil law is a contract between two or more persons who agree to enter into any kind of business. They combine their knowledge, property, and effort and then share into the partnerships profits. You can use a verbal agreement to form a partnership but going professional about it is always the best decision. In a General Partnership, profits and losses are always shared.
A General Partnership has a severe liability to people affected by it which is by far its greatest disadvantage. The partners are jointly responsible in case of debts or any misdemeanors.
Forming a limited partnership only requires you to file a certificate of limited partnership with the Wyoming Secretary of State. In such a case, one or more partners contribute to the business enterprise but won’t have to participate in the enterprises’ daily activities. Limited partners are also silent partners and only liable to the extent of the investment that they would’ve made. They only receive income, tax and capital benefits.
Restricted Limited Partnership:
This is another entity that is allowed only in Wyoming. It takes advantage of Treas. Reg. §25.2704-2(b) which states that a restriction which is less restrictive than those that would apply under state law will be disregarded in valuing the interest for transfer tax purposes under IRC §2704(b). This is complicated to set up by yourself.
Want to start a company in Wyoming? Learn more here.