Deal alert! Northwest will form your LLC for $39 (60% discount). See details.
Note: If you live in Wyoming, do business in Wyoming, or are a non-US resident, then this information doesn’t apply to you.
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
Need to save time? Hire a company to form your LLC:
Northwest ($39 + state fee) or LegalZoom ($149 + state fee)
(Learn why Northwest is #1 in Northwest vs LegalZoom)
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
Does it matter where I start my LLC if my business is online with no physical presence?
Frankly, the state governments don’t care if your business is online or not.
The fact that you run your business from your home (which is located in a state) means you’re doing business in that state. Even if you work from a coffee shop, that coffee shop is also located in a state.
And that state wants to collect their tax revenue and enforce their LLC filing requirements for businesses illegally operating in the state.
Is Wyoming a good state to start an LLC?
Whether Wyoming is a good state to start an LLC depends on where you live – and where you’re doing business.
Meaning, if you live in or do business in Wyoming, then you should start your LLC in Wyoming. While many websites talk about tax rates and advantages of certain states, none of that applies if it’s not the state where you live and do business.
For example, if you form an LLC in Wyoming, but live in and conduct business in South Dakota, you’ll also need to register your Wyoming LLC in South Dakota (and pay extra fees). And you’ll end up paying South Dakota taxes anyway. This ends up leading to more costs and more headaches with no advantages.
In summary, if you live in and conduct business in Wyoming, then yes, Wyoming is a good state to start a business. If you don’t live in and do business in Wyoming, then no, Wyoming isn’t a good state to start a business.
Real estate exception: If you’re purchasing real estate outside of Wyoming, you should form your LLC in the state where the property is located.
For more information, please see Best State to Form an LLC.
References
Wyoming Economic Development Agency: Licensing and Permitting
Wyoming Secretary of State: Should I Apply for a Certificate of Authority?
Wyoming Statutes: Title 17 (Corporations, Partnerships, and Associations)
17-19-1501. Authority to transact business required
17-19-1502. Consequences of transacting business without authority
17-19-1503. Application for certificate of authority
17-19-1530. Grounds for revocation
17-19-1531. Procedure and effect of revocation
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.
Need to save time?
Hire a company to form your LLC:
Northwest ($39 + state fee)
LegalZoom ($149 + state fee)