Forming and LLC in Nevada or Wyoming
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Table of ContentsIs it Better to Form an LLC in Wyoming or Nevada?Potential Benefits of Each StateWhere is the Property Located?Academic Research
Is it Better to Form an LLC in Wyoming or Nevada?
Deciding which state in which to incorporate is a significant decision for any business. This is particularly true for real estate holding entities. Holding entities wholly owned by an individual are generally limited liability companies (LLC). Holding entities for investment funds, generally form a complicated limited partnership structure. In such entities, it is not uncommon for the entity holding title to the real estate to also by an LLC. There are various considerations when determining in which state to form the LLC to hold the business interests. It is important to remember that the holding entity will be registered to do business as a foreign entity in any state where it holds the real property. The state of organization is chosen for purposes of making contracts and internal governance documents subject to that state’s laws. Two of the primary states for LLC formation in the real estate industry are Nevada and Wyoming. These states have very developed LLC laws, in addition to offering numerous other advantages.
In this article, we discuss the various considerations and benefits associated with organizing in each state.
Potential Benefits of Each State
Both Nevada and Wyoming offer extensive business governance protections. For example, neither state has capital requirements, requirements of locations of meetings. Also, each state has significant protections for members through its business judgment rules and protections from piercing of the veil of liability. The areas for consideration where the states differ notably include:
Filing Fees - Wyoming is a far cheaper venue to form and maintain a business entity. The filing rate in Wyoming is $100 and $50 to renew. The rate in Nevada is $425 to form and $350 to renew. This can become expensive if you have an LLC to hold each property or if you regularly flip houses. You form and dissolve the LLC with each flip.
Taxes - States generally collect taxes on the income generated by a business in that state. For real estate holding entity, it may also tax any gains on property sold at an income tax or capital gains rate. This is true in Nevada and Wyoming. The LLC will make the selection of being taxed as a partnership or a corporation. If taxed as a corporation (under Subsection C of the Internal Revenue Code), the business entity will pay taxes at the federal corporate income tax rate. Both Nevada and Wyoming do not charge state income taxes on corporations. Further, neither Nevada nor Wyoming charge personal income taxes, which is relevant if the LLC is taxed as a partnership. As such, this consideration is irrelevant except to the extent that income generated from the LLC is allocated to Wyoming or Nevada.
Anonymity - Nevada and Wyoming take steps to allow anonymity of ownership of its LLCs. Nevada and Wyoming allow the state to appoint a nominee manager to file the annual disclosures. This nominee name is used to protect the names of LLC members from public disclosure. This structure is not allowed in other states. Wyoming does not require disclosure of the members or manager nominee to the state at the time of filing. The state only becomes aware of the members or manager nominee at the time of the annual filing. In Nevada, the company must disclose the manager nominee or member list immediately to the state. The benefit of Wyoming in this situation is that it allows for complete anonymity for a year. This is useful for purpose of flipping property under anonymous conditions. Of course, anonymity can be a double-edged sword. It can protect individual identities, but it can also cause difficulty when dealing with individuals who require confidence in the company. For example, each state makes it difficult to open an in-state bank account under the name of the nominee. It is easier in Wyoming than in Nevada.
Business Court - Nevada has a dedicated business court. The judge presiding over the business court is an expert. Further, for governance disputes, the business owners and managers dispute to the jurisdiction of the judge to determine disputes without the use of a jury. This can make a significant difference when it comes to potential litigation in the state. This level of comfort in the system can justify the high filing costs.
General Business License - Wyoming, unlike Nevada, does not require the business to acquire a business license to form an entity. In Nevada, the individual would need to file for a local business license where the property is held.
Charging Order Protection - In most states, the creditor of an individual can sue the individual an obtain a judgment. The judgment can then be executed against any of the individual’s assets, including their ownership interest in an LLC. The court can force the LLC to be sold to pay the individual’s debts. In Wyoming and Nevada, the creditor cannot force the sale of an individual’s LLC interest to pay a debt. As such, debtors can hide assets from creditors in an LLC to avoid collection. The sole remedy for the creditor in these states is to obtain a charging order against the LLC. This requires the LLC to pay any distributions that would go to the LLC member (the debtor) to the creditor. The problem is that the charging order does not force distributions. This rule effectively protects all assets held in the LLC.
Where is the Property Located?
While a company is free to organize in its state of choice, it will always be subject to the laws of the state in which it carries on business. For example, if I form my business in Wyoming, I must then register my business in the state in which it carries on business activity. Business activity includes holding property for rental purpose. It may also include situation where land is bought, held, and sold. So, my Wyoming LLC holds ownership of property in Texas. My LLC is subject to the laws of Texas. If I am sued, I can be sued in Texas state court. The one benefit to this scenario is that I can may many of my real estate contracts subject to Wyoming law. That is, if I have contracts with contractors, tenants, developers, etc., then I can validly make the agreement subject to Wyoming law. If there is a dispute under these agreement, the dispute may be tried in Texas, but the applicable law will by primarily Wyoming law.
If you do not have an operational situation where employing the law of Wyoming would help you in your business operations (including business ownership structure), then you should consider avoiding Nevada and Wyoming and simply organizing in your state of operations. This will also save you the cost of annual registration in both states.