Do you want to protect yourself from lawsuits, business failure, and high taxes?
The first thing you need to do is decide on which type of entity you want and a name for the corporation or LLC.
There are three main choices, a regular corporation, a close corporation, and a LLC. You may have heard of a S-corporation. That is a tax election you file with the IRS later after the corporation is formed and not something to be decided now. The “S” election passes all income down to the stockholders for tax. That defeats the purpose of a Wyoming corporation to save taxes if you live in a state with an income tax.
The C-corporation is the most commonly formed corporation. It is great for raising capital and limiting individual liability. The corporation is a legal separate “person” which may live forever and be passed down from generation to generation. It protects the shareholder from any adverse actions the corporation may encounter. Just as an individual it can own assets, borrow money, mortgage its assets, and file bankruptcy. Shareholders elect a board of directors and officers to manage the corporation. Wyoming allows one person corporations. You can be the only shareholder who is also the director and officer.
- Limited liability–no shareholder; director or officer may be held liable for debts of the corporation unless corporate veil was pierced.
- Credit building–corporations build credit under their own EIN number totally separate from shareholders.
- Capital raising–corporations may sell common or preferred stock, issue bonds, borrow money, mortgage assets. There is no limit on the number of shares issued.
- Legal agreements–corporations may enter into contracts and legal agreements.
- Continuity of life–the entity exists forever so long as corporate regulations are met. No need to dissolve the corporation if an owner or manager dies.
- Ease of ownership transfer–the assets may be sold, transferred, pledged, or mortgaged simply by using stock.
- Income is taxable to the corporation and not shareholders. A Wyoming corporation pays NO state income tax.
- You may have heard of double taxation. Double taxation can occur when corporate profits are taxed at the corporate level and are returned to investors as dividends to be taxed again as individual income. The simple solution is for the corporation not to pay dividends. There are plenty of other ways to get money out of the corporation. You can pay yourself whatever wage you want. Shareholders could receive consulting fees. You can have the corporation reimburse you for expenses. The corporation can spend its money on anything the owners of the corporation want. It can buy you an ice cream cone everyday if wanted. It doesn’t have to be deductible or even make sense.
- Corporations file on IRS Form 1120 and report earnings and taxable profit.
- May be subject to quarterly estimated tax payments.
- Must withhold and match employment taxes on any wages paid its employees.
CLOSE CORPORATION – Our Favorite!
Wyoming is one of the few states that realizes there are many corporations that are held by just one person or a small number of family members or individuals. Close corporations are regular business corporations that elect to operate in a more informal manner similar to partnerships. Regular business corporations must conduct shareholder and director meetings, elect a board of directors, and provide shareholders with written proposals for any major corporate action to be voted on in the annual meetings. Close corporations usually do not hold annual meetings because the same people are shareholders and managers of the corporation or they see each other regularly. They do not need an “official” meeting to talk to themselves. A Board of Directors is also not required and there is much less formal paperwork required for ongoing operations.
- Limited shareholders–Close corporations may not have more than 35 shareholders.
- Abbreviated governance–Shareholders may agree in writing to treat the corporation as a partnership, operate without a board of directors, dispense with annual meetings, and make a shareholder agreement. (Note this must appear in the Articles of Incorporation.)
- Limited liability–Shareholders enjoy the same personal liability protection as regular corporations even though they relax corporate formalities in operations.
- Ease of operation–Operates like a sole proprietor or partnership without the formality required in regular corporations where hundreds of shareholders must receive information and vote.
- Buy-out provisions–Shareholder agreement can guarantee who may buy out a shareholder who wants to sellout or is deceased.
- A close corporation can be changed to a regular corporation at anytime with shareholder approval. As your company grows you can switch and then have an unlimited number of stockholders or even take your company public.
- Income is taxable to the corporation and not shareholders.
- A Wyoming Close corporation pays NO state income tax.
- We believe Close Corporations are the very best vehicle for small and medium business. In return for its simplicity you are limited to 35 shareholders. If the time comes where you need to have more shareholders it is simple to change to a regular C-corporation.
S – CORPORATION
“S” status for a corporation is a tax election taken by any regular C- corporation or close corporation which meets specific criteria. Domestic corporations having 100 or fewer shareholders all of the same class of stock who are citizens of the U.S. or resident aliens may elect to pass gains or losses, credits or deductions, on to shareholders in much the same manner that partnerships are taxes. Individual shareholders may benefit from a reduction in their taxable income if the corporation operates at a loss. Despite their unique tax treatment, “S” corporations maintain full corporate attributes like limited liability and continuity of life.
If you live in a state with a personal income tax a “S” corporation would defeat the purpose of a Wyoming corporation to avoid taxes. All of the S-corporations income is passed directly to shareholders for taxation.
- Limited shareholders–no more than 100 shareholders.
- Must have only one class of stock such as common, but may have voting and non-voting.
- Citizen shareholders–must have shareholders who are citizens of the U.S. or resident aliens.
- All shareholders must consent to “S” corporation status.
- S- corporations may pass losses on to shareholders however shareholders must pay taxes on any income.
A LLC is basically a partnership with the liability protection of a corporation. A Limited Liability Company (LLC) passes gains or losses, credits or deductions, on to the members of the LLC in the same manner that partnerships are taxed. Individual members may benefit from a reduction in their taxable income if the corporation operates at a loss. Despite their unique tax treatment, LLC’s maintain full corporate attributes like limited liability. An LLC can later be converted to a C corporation. Unlike corporations with shareholders, LLCs have members. A managing member runs the LLC.
- Corporate attributes–offers members limited personal liability, the same as a C corporation offers.
- LLC’s may operate at a loss in their first years. Members may benefit from a reduction in their personal taxable income by receiving their share of corporate losses.
- Corporation continuity – life of a LLC has a set ending date.
- A Wyoming LLC provides no tax savings if you live in a state with a personal income tax. All income of the LLC flows though to members.
The main differences between a regular LLC and a Close LLC is there is a restriction on the selling of a member’s shares. A member must offer the shares, for sale, to the other member(s) of the LLC, before they can be sold to anyone else. All members also must approve of the sale of shares. This works well in a closely held family company, were the parents want to make sure that the children can not sell part of the company to outsiders.
A Close LLC is not required to hold annual meetings, unless requested by a member.
The Close Limited Liability Company Supplement, articles of organization, and operating agreement of a close limited liability company may also restrict transfer of ownership interests, withdrawal or resignation from the company, return of capital contributions and dissolution of the company.