Planning with the Wyoming Close LLC

In 1977 Wyoming was the first state to enact laws permitting the creation of a Limited Liability Company. An LLC combines the best features of a corporation with the best features of a partnership. Among other things, an LLC has the limited liability of a corporation and the ease of management and flow-through income tax treatment of a partnership.

In 2000, Wyoming again led the nation by enacting its Close LLC statute. This type of LLC is designed specifically for a small closely held family business. Family assets (such as stocks, bonds, farms, ranches, rental property, CDs and family businesses) can be managed under the protective umbrella of a Wyoming Close LLC.

Asset Protection

In our litigious society very few of our assets are truly safe from attack. However, the structure of the Wyoming Close LLC enables us to protect many of our assets.

If the owner of an LLC is sued, for example, as a result of an automobile accident, the owner’s interest in the LLC cannot be seized to satisfy a legal judgment against the owner.

Wyoming statutes provide that the exclusive remedy of a judgment creditor is a Charging Order. This is a court order that instructs the LLC’s manager to pay any income that is distributable to the LLC owner to the judgment creditor instead. Of course, the manager of the LLC may choose not to distribute any income to the LLC owner, which would make the Charging Order of little value.

If a judgment creditor obtains a Charging Order, he may be subject to income tax on the income earned by the LLC, even though the LLC’s manager may not distribute the income. In other words, the judgment creditor may have to pay income taxes on income he never receives.

Family Control

The owners of the LLC appoint one or more managers of the LLC. Managers may be owners or non-owners. The managers have 100% control over the business and financial matters of the LLC. For example, if a mother is the owner-manager and her son is also an owner, but not a manager, the son cannot sell his interest in the LLC without the consent of his mother, the LLC manager. In addition, the son’s interest cannot be taken away from him in the event of a lawsuit, divorce proceeding or bankruptcy.

Simple to Manage

The IRS requires the Wyoming Close LLC to obtain a taxpayer ID Number, but the LLC itself will never pay income tax, since all income flows through to the owners. Wyoming has no state income tax.

Only one checking account is necessary to pay expenses of the LLC. No formal meetings or minutes are required.

The owners may manage the LLC, or they may appoint managers who are not owners. For example, a parent may be the owner, but appoint the child to be the manager.

Valuation Discounts

Although an LLC should never be established solely to save taxes, a by-product of owning assets in a Wyoming Close LLC is that for gift and estate tax purposes, the value of an owner’s LLC interest is not equal to the value of the assets inside the LLC. Often the discounts given by professional business appraisers are 30% – 50% or more. These discounts are the result the laws governing the Wyoming Close LLCs and restrictive language in the LLC documents to protect the owners from lawsuits, divorce proceedings, creditors, bankruptcies, etc. Because of these restrictions, a buyer outside the family would not pay full value for an ownership interest in the LLC. The buyer would not like the fact that he could not sell or give away his interest without the approval of the LLC’s mangers, who would probably be individuals unrelated to him. Also unattractive is the fact that the buyer would get income only if the manager voted to distribute income, and in the event no income was distributed, the buyer would still receive an IRS form K-1 that requires the buyer to report the undistributed income on his income tax returns.

For example, if you were to transfer your $1,000,000 brokerage account into your Wyoming Close LLC, you will still control the funds, but no one will be able to take the assets away from you. You could make annual gifts of interests in the LLC worth up to $20,000 per family member with a tax value of only $11,000 per gift. The interests belonging to your family members would also be protected from creditors. And, when you die, your ownership interest in the LLC for estate tax purposes will likely be valued at $600,000 – $700,000 rather than $1,000,000. The tax savings could reach several hundred thousand dollars or more.