Wyoming LLCs for California Residents
California residents who are looking for the best asset protection strategy often look to the state of Wyoming. Wyoming has made a significant effort to become the go-to state for asset protection. The state of Wyoming is particularly appealing for its Wyoming LLCs. But why would a California resident set up an LLC in Wyoming instead of California? Why wouldn’t a California resident simply create a California LLC? What happens if the Wyoming LLC owns California real estate?
Structure of a Wyoming LLC
Let’s get some basics out of the way first. A Wyoming LLC is a separate legal entity created under state law. An LLC will have at least one member and typically a manager. The manager of the LLC controls the operation of the LLC. The member owns the financial interest in the LLC. The manager is not required to have an ownership interest in the LLC. However, for many clients, they are the sole manager and sole member of their LLC. These basics apply to both Wyoming LLCs and California LLCs.
If you are the sole member of an LLC, then this LLC is often referred to as a Single Member LLC (or SMLLC). This is important because some states provide Single Member LLCs with less protection. Wyoming, however, provides the same protection to Multi Member and Single Member LLCs.
For tax purposes, a Single Member LLC is typically considered a disregarded entity. This means that you will report all federal income tax on your individual income tax return and not on a separate business return.
With these basics out of the way, let’s breakdown the asset protection, the privacy and the cost of using a California LLC vs. Wyoming LLC.
Asset Protection
The first question we have to ask in asset protection is: what are were protecting? There are “inside liabilities,” which are liabilities originating from within the LLC’s business activities. And then there are also “outside liabilities,” which are liabilities affecting a member of the LLC which don’t stem from the LLC’s business activities. An example of an inside liability is an LLC that owns residential property and the tenant sues for mold. An example of an outside liability would be if you caused a car accident unrelated to the LLC and the plaintiff wanted to collect from an LLC membership interest. For purposes of asset protection, we are concerned with both inside and outside liabilities, but the focus of most Wyoming LLCs is on outside liabilities and the reason why some California residents choose to create a Wyoming LLC over a California LLC.
Under Wyoming law, a charging order is the sole remedy available for creditors of LLC members. What is a charging order? A charging order is an order by the court instructing a business (an LLC) to distribute all income to the creditor that would normally go to the LLC member until the judgment is satisfied. This order makes collecting a judgment extremely difficult for a creditor as it can’t force the LLC Manager (who is typically a Member as well) to distribute income when they know it will end up in the hands of the creditor. This additional layer of protection gives the LLC more negotiating power in resolving their differences with creditors. Most importantly for many of our clients, Wyoming provides this protection to single member LLCs. Many states, including California do not provide this protection to single member LLCs.
Under California law the creditor can go a step further. The creditor can foreclose upon a charging order. Upon foreclosure of a charging order the court will direct the sale of the member’s economic interest in the LLC. While the purchaser of the foreclosed economic interest in the LLC may still not receive any distributions or have any right to participate in the management of the LLC, the holder of the foreclosed interest will almost certainly have the right to receive a portion of any proceeds if and when the LLC is dissolved. It will also now permanently own the economic interest in the LLC.
For these reasons, Wyoming LLCs are considered a better vehicle for asset protection.
However, the analysis does not stop there. If you are a California resident, your outside liabilities are likely to arise in California. Therefore, any judgment against you is likely to be in California. Will a California court apply Wyoming law to a Wyoming LLC when the judgment was in California and the debtor resides in California? The verdict is still out. However, from an asset protection perspective, it provides an additional layer of protection with a Wyoming LLC.
Privacy
For some, privacy is of very little importance. For others, it is their primary concern. Under a Wyoming LLC, the managers or members are not disclosed through Wyoming’s Secretary of State. The Wyoming Annual Report only discloses the address of the business and the Registered Agent. However, this not the end of the analysis. Anytime you form an LLC in Wyoming as a California resident, and you will be the manager of that LLC, you are required to register that LLC in California. More on that below when discussing cost. Long story short, because you will almost certainly have to register your Wyoming LLC in California, you will have to disclose the names and addresses of the managers of the Wyoming LLC in California. California wants their piece of the pie. Failing to file in California incurs a penalty of $2,000 per year and other legal consequences related to your business.
Cost
If a California resident forms a Wyoming LLC they will pay attorneys’ fees, filing fees and registered agent fees. The initial filing fees are $100 and then $60 per year thereafter (assuming you had no assets in Wyoming). You will also pay registered agent fees (company in Wyoming to accept service of any lawsuits) between $50 and $200 per year.
Attorneys’ fees can vary widely. It is important to note that a properly drafted operating agreement for your business or asset is the single most important document related to your LLC. If there is a lawsuit, it will be Exhibit A. Template operating agreements that are thrown in a drawer and not used to operate your business are useless and may hurt your defense. Don’t go through the effort and cost of structuring your LLC for protection and then fall short on a properly drafted operating agreement.
Many California residents choose Wyoming LLCs over California LLCs for the cost savings. After all, California LLCs cost a minimum of $800 per year compared to $60 per year in Wyoming. However, as explained above, if you are managing your Wyoming LLC from California or if the Wyoming LLC owns real estate in California, you will be required to register your Wyoming LLC in California. This means that you will have to pay annual fees of $800 in California and $60 in Wyoming. This certainly increases the annual cost of your LLC dramatically. But you have to ask yourself: where is the lawsuit coming from? Wyoming? No. If you live in California your lawsuit is likely related to a California property, a California action and a California plaintiff. How will a California court treat a Wyoming LLC that failed to register in California? I would not want to be the attorney defending you in that case. Therefore, you should register your Wyoming LLC in California.
In the end, does it make sense to still create a Wyoming LLC to own California property or to own other assets? Generally, yes since Wyoming LLCs still provide better protection.
John Wong advises on all aspects of estate planning, probate, asset protection and trust administration. He believes that estate planning is about planning for life; while having protections in place should the unexpected occur.
