Take a Moment to Contact
Gonnella & Majors, PC

Wyoming Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a hybrid of a corporation and a partnership in that it
combines the most favorable characteristics of each. It allows the pass-through of income,
deductions and credits without the pass-through of liability.

The first state to enact LLC legislation was the State of Wyoming in 1977.  Thereafter, other
states began allowing LLC's as a business entity, but LLC's were not favored as there was
minimal case law governing this type of entity and because not all states had adopted LLC
legislation.  This created a concern that if an LLC were created in a jurisdiction statutorily
allowed and it thereafter conducted business in a state not recognizing LLC status, a
serious liability question could arise.  The concern was that unless the laws of the state of
organization of the LLC could be recognized as controlling, a creditor may be able to reach
the assets of the entity owners (the members) of the LLC as if they were general partners in
the nonrecognizing state.  Thus even though LLCs have been in existence in state law for
many years, the entity of choice for most estate planners remained the family limited
partnership.

At present, there is a growing body of LLC case law and all 50 states have enacted LLC
legislation.  The historical concerns regarding LLC's have thus been obviated.  LLC's have
become one of the most exciting tools in the estate and business planning world.  However,
there is no uniform LLC law and each state’s laws currently differ.  It is important to study the
various laws to determine which jurisdiction best meets your goals.  

The Basic Characteristics of a Limited Liability Company are as follows:

  • It is a creature of state law and is created by the filing of Articles of Organization with
    the appropriate state entity.  In Wyoming, this entity is the Secretary of State.

  • Members are the equity owners of the LLC.  Some states require a minimum of two
    members, but most states allow a one person LLC.  There is no limit to the number of
    members of an LLC and members may be individuals, trusts, corporations, general or
    limited partnerships, estates, or other LLC's.

  • Managers of the LLC are much like a board of directors of a corporation.  They
    oversee the long-term goals and operations of the business as mandated by the
    LLC's members.  The LLC may be member managed or manager managed.  If
    manager managed, the manager need not be a member.

  • The entity may conduct almost any type of business unless specifically prohibited by
    state law.

  • The members and managers are protected from “personal liability” for the entity’s
    debts and other obligations.  Generally, the limit of an individual member’s liability in
    an LLC is to the extent of his or her investment.

  • The LLC has an operating agreement similar to a partnership agreement that defines
    the terms upon which the entity will do business.  This agreement must be agreed
    upon by all the members.

There are many reasons for creating a business entity such as an LLC or limited
partnership (LP), but the main ones are as follows:

  • The statutory protection from creditor claims is one of, if not the main, reason in most
    cases, for creating a business entity.  State law creates this protection from personal
    liability.  However, this statutory protection from claims differs widely from state to
    state.  If creditor protection is a concern, it is vital for you to research the best states
    for such protection.  It is also wise to review the state’s legislation for both limited
    partnership (LP) creditor protection as well as LLC creditor protection, as the laws of
    each state vary as to the protections provided for these two differing business
    entities.  

  • Business entities are created to provide centralized management for diverse business
    entities.  It is important to treat the entity as a business and manage it as a business
    should be managed.

  • Business entities are created to provide a structured environment for the sale or
    gifting of interests to others, generally family members.  If the entity is created, an
    ownership interest in it may have a significantly different value from a proportionate
    value of the specific assets held within the entity itself.  

With the changes in Limited Liability Company legislation, our attorneys believe that LLC's
are almost always the preferred business entity over a limited partnership.  There are two
main reasons:  1) they are less complex and require less administration and 2) depending
on the state, they are better for creditor protection.

Ease of Administration

Limited partnerships require a general partner and a limited partner.  Only the limited
partner is statutorily afforded limited liability protection.  The general partner is exposed to
personal liability for claims of the partnership.  If the general partner wants limited liability, it
is necessary to wrap another business entity around the general partner.  This entity is
often a corporation, an irrevocable trust or an LLC.  Because there are two distinct business
entities, the following is required:

  1. Two Tax Identification Numbers.
  2. Two Annual State Reports.
  3. Two Checking Accounts.
  4. Two Registered Agents.
  5. Two Annual Federal Tax Returns.
  6. Two Professional Fees for above.

Because the LLC provides limited liability for all its members, whether they are managers
and/or members, only one entity is required, thus making the administration of the entity
much easier on the client and less likely for mistakes.

Creditor Protection, Comparison of FLP Statutes and LLC Statutes

Our clients have worked hard for the assets they have, but often do not spend much time on
insulating, protecting and keeping their assets free from creditor claims.  

Business entities that are filed of record with the state are by statute given protection from
creditors, as this recordation gives notice to the world that the entity is independent from the
owners of the entity.  Statutory entities include several different types of corporations, limited
partnerships and limited liability companies.  The entity must remain independent, with its
own checking account, tax identification number and annual tax filings.  However, states vary
widely on the type of protection that an entity is granted under its statutes.  Some are
creditor friendly, others are creditor unfriendly.  Below are examples of FLP and LLC
statutes regarding creditor protection of the various states.  However, these statutes are
continually changing, and no one should rely on the following, but to check the statues of
the jurisdictions being considered at any given time.

The Limited Partnership Under RULPA

The Revised Uniform Limited Partnership Act (RULPA) was enacted in 1976 and amended in
1985.  Historically its Section 703, Rights of a Creditor, was interpreted to read that a
charging order was the only remedy allowed a Court to give a creditor of a partner in a
partnership.  Section 703 in pertinent part reads as follows:  

    On application to a court of competent jurisdiction by any judgment creditor of a
    partner, the court MAY charge the partnership interest of the partner with payment of
    the unsatisfied amount of the judgment with interest. (Emphasis added)

Charging orders are unattractive remedies for a creditor as the creditor stands in the shoes
of an assignee and will not receive anything from the partnership unless distributions are
made to the debtor partner.  One position is that the creditor issued a charging order may
not receive any distributions but may be required to pay the taxes on undistributed profits of
the partnership upon receipt of a K-1, putting the creditor in the position of throwing good
money after bad.

However, the view that a charging order is the sole remedy under this Section 703 is subject
to attack because of the word “may” in the statute.  All but a few states fail to specifically limit
the remedy to a charging order.   Thus the argument can be made that in addition to a
charging order, a creditor can ask and a court can order a foreclosure of the interest
subject to the charging order.  The foreclosure is different from the charging order in that it
is permanent, and that a purchaser at a foreclosure sale enjoys the right to a proportionate
share of the partnership’s assets upon dissolution—increasing the creditor’s chances of
having the debt satisfied out of the partnership interest.

States that have the RULPA Section 703 are as follows:

Alabama, Arkansas, Colorado, Connecticut, Florida, Idaho, Illinois, Indiana, Iowa, Kentucky,
Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Minnesota, Mississippi,
Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North
Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah,
Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming, District of Columbia.

The Limited Partnership Act under ULPA

Section 703 of the 1976 Act is currently subject to amendment by Section 703 of the Uniform
Limited Partnership Act of 2001.  This Section is even more creditor friendly, in that it
specifically allows a creditor to foreclose.

The Uniform Limited Liability Act (Uniform LLC Act) in essence adopted the provisions of the
UPLA.  Section 703 of the ULPA in pertinent part reads as follows:

    On application to a court of competent jurisdiction by any judgment creditor of a
    partner or transferee, the court may charge the transferable interest of the judgment
    debtor with payment of the unsatisfied amount of the judgment with interest.  To the
    extent so charged, the judgment creditor has only the rights of a transferee.  The
    court may appoint a receiver of the share of the distributions due or to become due to
    the judgment debtor in respect of the partnership and make all other orders,
    directions, accounts and inquiries the judgment debtor might have made or which the
    circumstances of the case may require to give effect to the charging order.

A charging order constitutes a lien on the judgment debtor’s transferable interest.  The court
may order a foreclosure upon the interest subject to the charging order at any time.  The
purchaser at the foreclosure sale has the rights of a transferee.

The Wyoming Close Limited Liability Company

The Close Limited Liability Company (LLC) was enacted by the Wyoming State Legislature
in 2000.  It augments the more general Wyoming Limited Liability Company statutes,
providing greater restrictions on transfers of ownership interests, withdrawal or resignation
from the LLC, and return of capital contributions and dissolution of the LLC.  Where these
statutes are silent or do not conflict with the general Wyoming LLC laws, such laws are also
applicable to the Close LLC.  The Wyoming Close LLC is the entity of choice for the
following reasons:

  • Ease of Administration
  • Creditor Protection
  • Maximization of Discounts
  • Flexible and Broad Business Purpose Language
  • Low Fees

Creditor Protection in Wyoming

The Wyoming Close LLC statutes have some if not the best creditor protection, not only
because it is an “exclusive remedy” state, but because of its restrictions on a member’s
ability to withdraw and/or dissolve the entity.

The Wyoming Close LLC statute is silent as to the rights of a creditor to attack a member’s
interest in the LLC, and thus one must look to the general Wyoming LLC statute, found in
WS § 17-15-145.  It reads as follows:

    WS §17-15-145, Rights of Creditor

    On application to a court of competent jurisdiction by a judgment creditor of a member
    of a limited liability company or a member’s transferee, the court may charge the
    member’s distributional interest in the limited liability company with payment of the
    unsatisfied amount of the judgment with interest.  To the extent so charged, the
    judgment creditor has only the rights of a transferee of the member’s interest as
    provided in WS § 17-15-122.  The charging order is the exclusive remedy by which a
    judgment creditor of the member or transferee may satisfy a judgment against the
    member’s interest in a limited liability company.  This section does not deprive any
    member of a limited liability company of the benefit of any exemption laws applicable
    to the member’s interest.

This requirement is the most restrictive and “creditor unfriendly” as it denies a creditor any
remedy other than to acquire a charging order and allows a creditor to have distributions
only if the manager of the LLC decides to make any distributions.  It cannot disrupt the
ongoing business of the LLC.  

In addition, if perchance a creditor is allowed to step into the shoes of a member, the
member’s interest in a Wyoming Close LLC is very restrictive, as evidenced in the below
statute:  

    WS §17-25-107, Withdrawal of Members and Return of Member’s Contributions to
    Capital
    (a) A member may only withdraw from a close limited liability company upon the terms
    and conditions set forth in the operating agreement.  If no terms and conditions for
    withdrawal of a member are set forth in the company’s operating agreement, a
    member may withdraw only with the consent of all other members of the company.
    (b) A member shall not receive out close limited liability company property any part of
    his or its contribution to capitol unless:
    (i) All liabilities of the company, except liabilities to members on account of their
    contributions to capitol, have been paid or there remains property of the company
    sufficient to pay them; and
    (ii) All members consent to such return of contributions to capitol;
    (iii) The company is dissolved; or
    (iv) The articles of organization or operating agreement of the company otherwise
    provide for the return of contributions to capitol.
    (c) In the absence of a statement in the articles of organization to the contrary or the
    consent of all members of the close limited liability company, a member, irrespective
    of the nature of his or its contribution, has only the right to demand and receive cash
    in return for his or its contribution to capitol.
    (d) A member of a close limited liability company may not have the company dissolved
    for a failure to return his or its contribution to capitol.

These restrictive statutes make Wyoming an excellent choice for LLC planning.

Valuation Adjustments and Applicable Restrictions

Business entities are often used in conjunction with estate planning as they can assist in gift
and or estate tax reduction.  Typically, when a client transfers assets to a business entity
such as an LLC, he or she exchanges those assets for membership units in the LLC.  
Having made the exchange, the client no longer owns the various assets but only the value
of the units inside the LLC.  Often the value of an ownership interest in a business entity
may be significantly different from a proportionate value of the specific assets held by the
business entity.  According to IRS regulations, fair market value is the “price at which the
property would change hands between a willing buyer and a willing seller, neither being
under any compulsion to buy or to sell and both having reasonable knowledge of relevant
facts”.

It is well established in case law that in determining the fair market value of an interest in a
closely held business, the value will be adjusted to reflect various discounts such as a
discount for lack of marketability, a discount for lack of control, a discount for a minority
interest and a discount for fractionalized interests.  These discounts can result in a very
favorable valuation adjustment for estate and gift tax purposes.

In addition to an analysis of the assets of the LLC and the interests of the members, the
operating agreement between the members of the LLC is scrutinized by a business
appraiser to determine exactly what the valuation adjustment or discount should be.  The
appraiser reviews many issues, including what members have control, a member’s ability to
withdraw from the LLC, and the ability of members to dissolve the LLC.  The greater these
restrictions, the greater the decrease in the value of a member’s units.  

However, Congress has placed some requirements on restrictions in operating agreements.  
In the Omnibus Budget Reconciliation Act of 1990 (OBRA 1990), it enacted a series of
special valuation rules applicable to transfers of interests in corporations, partnerships,
trusts and limited liability companies.  One of these provisions, Section 2704(b), provides in
pertinent part:

    Sec. 2704(b). Certain Restrictions on Liquidation Disregarded.-
    (1) In general.-For purposes of this subtitle, if-
    (A) There is a transfer of an interest in a corporation or partnership to (or for the
    benefit of) a member of the transferor’s family, and
    (B) The transferor and members of the transferor’s family hold, immediately before
    the transfer, control of the entity, any applicable restriction shall be disregarded in
    determining the value of the transferred interest.
    (2) Applicable restriction.  For purposes of this subsection, the term “applicable
    restriction” means any restriction --
    (A) Which effectively limits the ability of the corporation or partnership to liquidate; and
    (B) With respect to which either of the following applies:
    (i) The restriction lapses, in whole or in part, after the transfer referred to in
    paragraph (1).
    (ii) The transferor or any member of the transferor’s family, either alone or
    collectively, has the right after such transfer to remove, in whole or in part, the
    restriction.
    (3) Exceptions.  The term ”applicable restriction” shall not include --
    (B) any restriction imposed, or required to be imposed, by any Federal or State law.
    Section 25.2704(b), Gift Tax Regs., provides that an applicable restriction is a
    restriction on “the ability to liquidate the entity (in whole or in part) that is more
    restrictive than the limitations that would apply under the State law generally
    applicable to the entity in the absence of the restriction”.

These restrictions only apply in transfers to family members, as defined in the Code and
accompanying Regulations.  Thus where a transferor and his/her family control a business
entity, a restriction on the right to liquidate the entity shall be disregarded in determining the
value of an interest that has been transferred to a family member if, after the transfer, the
restriction on the liquidation either lapses or can be removed by the family.  Because
withdrawal restrictions in an operating agreement can have the effect of liquidating the
entity, it is important to scrutinize the operating agreement regarding a member’s right to
both liquidate the LLC and to withdraw from the LLC.

An applicable restriction is “a limitation on the ability to liquidate the entity (in whole or in
part) that is more restrictive than the limitations that would apply under the State law
generally applicable to the entity in the absence of the restriction”.  (Section 25.2407-2(b),
Gift Tax Regs.).  Thus it is very important to analyze the state law governing the entity to
determine how restrictive that law is, because it is that state law that must be applied when
determining the discount, regardless of how restrictive liquidation rights or withdrawal rights
are defined in the operating agreement.

The Wyoming Close LLC provides the following for liquidation and dissolution rights:

    WS §17-25-107, Withdrawal of Members and Return of Member’s Contributions to
    Capital
    (a) A member may only withdraw from a closed limited liability company upon the
    terms and conditions set forth in the operating agreement.  If no terms and conditions
    for withdrawal of a member are set forth in the company’s operating agreement, a
    member may withdraw only with the consent of all other members of the company.
    (b) A member shall not receive out of close limited liability company property any part
    of his or its contribution to capital unless:
    (i) All liabilities of the company, except liabilities to members on account of their
    contributions to capital, have been paid or there remains property of the company
    sufficient to pay them; and
    (ii) All members consent to such return of contributions to capital;
    (iii) The company is dissolved; or
    (iv) The articles of organization or operating agreement of the company otherwise
    provide for the return of contributions to capital.
    (c) In the absence of a statement in the articles of organization to the contrary or the
    consent of all members of the close limited liability company, a member, irrespective
    of the nature of his or its contribution, has only the right to demand and receive cash
    in return for his or its contribution to capital.
    (d) A member of a close limited liability company may not have the company dissolved
    for a failure to return his or its contribution to capital.

    WS §17-25-108, Dissolution
    (a) A close limited liability company organized under this chapter shall be dissolved
    upon the occurrence of any of the following events:
    (i) When the period fixed for the duration of the company expires;
    (ii) By the unanimous written agreement of all members; or
    (iii) At the time or upon the occurrence of events specified in the operating
    agreement.  
    (b)  As soon as possible following the occurrence of any of the events specified in
    subsection (a) of this section causing the dissolution of a close limited liability
    company, the company shall execute a statement of intent to dissolve in the form
    prescribed by the secretary of state.

Because the Wyoming Close LLC requires unanimous consent of all members for
withdrawal, dissolution and a return of capital, it has the most restrictive standards, and
therefore the “applicable restrictions” mandated in IRC 2704(b) do not apply.  Thus
maximized discounts are available for valuation purposes.

When choosing jurisdictions, it is vital that each statute for creditor protection, withdrawal
and dissolution be analyzed.  For example, the Arizona LLC statute for creditor protection is
very good, (charging order is the exclusive remedy) but its LLC statutes allow a member to
withdraw at any time and allow a dissolution to occur upon the written consent  of more than
one-half of it members or one (or more members) entitled to more than one-half of the
assets.  Thus, if an Arizona LLC operating agreement has liquidation or withdrawal
requirements more restrictive than the Arizona law, the applicable restriction rule of 2704
would apply, and the state law rather than the operating agreement would control for
discounting of the assets.  The same rationale applies to the New York LLC statutes, as they
state the default provision for dissolution is a majority in interest of the members.  Delaware’
s LLC dissolution statute allows for two-thirds of the members in interest to dissolve the LLC.

Many states in the country are similar to the Arizona, New York and/or Delaware statutes,
allowing member withdrawal within a certain period of time (i.e.:  30 days or six months) and
dissolution upon majority vote or another percentage, less than unanimous.  There are only
a few states that require one hundred percent consent of all members for these actions.  In
addition, some states allow for a return of LLC assets upon withdrawal, rather than cash.  
This return of assets can further disrupt the business of the LLC and could even force the
dissolution of the LLC.  Wyoming, in contrast, only allows for a return of cash, if agreed
upon by the members, and not a return of LLC assets.

Business Purpose

Clients must be aware that state statutes differ in regard to the business purposes allowed
for the LLC.  Some states have restrictive business purpose requirements.  These rigid
business requirements could allow a creditor to argue that an LLC created in such a state is
not truly running a business as stated in the requirements of a particular state’s statutes.  

Under Section § 75-15-103 of the Wyoming LLC Statutes, an LLC can be “organized under
the act for any lawful purpose except for the purpose of banking or acting as an insurer as
defined in W.S. 26-1-1-2(a)(xvi)”.  In essence, Wyoming allows an LLC to be created for any
purpose at all other than being a bank or an insurance company.  This very broad and
flexible language precludes a creditor from an attack that the LLC is not operating a
business under Wyoming law.

Low Fees

The Wyoming fee schedule for LLCs WS § 17-15-132 is very competitive with other
jurisdictions.  The fee for filing the LLC with the Secretary of State is $100.  Thereafter, the
LLC pays an annual fee of the greater of $50.00 or two-tenths of one mill on the dollar
(0.0002), if its capitol, property and assets reported, whichever is greater. However, that fee
is only charged on the property and assets within the State of Wyoming, and not on LLC
assets outside of the state.  Thus the great majority of LLCs in Wyoming merely pay the
minimal fee of $50 annually.
GONNELLA & MAJORS, PC
Attorneys and Counselors at Law

LEARN MORE ABOUT THE
SERVICES WE OFFER

ESTATE PLANNING

  • Revocable Living Trust
  • Last Will & Testament
  • Financial Power of Attorney
  • Health Care Power of Attorney
  • Living Will
  • Personal Property
    Memorandum
  • Health Insurance Portability
    And Accountability Act Form

ADVANCED ESTATE PLANNING
STRATEGIES


ASSET PROTECTION

  • Domestic Asset Protection
    Trust
  • Offshore Asset Protection  
    Trust
  • Wyoming Close LLC
  • Incorporation
  • Spendthrift Trust for Children
  • Failed Marriage Protection
  • Creditor Protection
  • Estate Tax Protection
  • Prenuptial Agreement

INCORPORATION SERVICES

  • Wyoming LLC
  • Wyoming Close LLC
  • Wyoming Flexible LLC
  • Corporation
  • Close Corporation
  • C Corporation
  • S Corporation
  • Nonprofit Corporation
  • Partnership
  • Limited Partnership
  • Family Limited Partnership
    (FLP)
  • Nonprofit Corporation
  • Tax Exempt Organization
  • 501(c)(3)
  • Registration of Business in
    Wyoming
  • Moving the Jurisdiction of
    Business to Wyoming

BUSINESS SERVICES

  • Securities
  • Mergers and Acquisitions
  • Annual Meeting Minutes
  • Buy Sell Agreements
  • Business Succession Plans
  • Tax Planning
  • Trademark
  • Tradename
  • Business License
  • Regulatory Requirements
  • Tax ID Number

TRUST AND PROBATE
ADMINISTRATION

  • Probate Administration
  • Ancillary Probate
    Administration
  • Affidavit of Survivorship
  • Affidavit of Distribution
  • Estate Tax Return
  • Probate Litigation
  • Tax Controversy
Gonnella & Majors, PC ▪ 575 South Willow Street ▪ P.O. Box 1226 ▪ Jackson, WY ▪ 83001
Phone (307) 733-5890 ▪ Facsimile (307) 734-0544 ▪ www.wyomingestatelaw.com


Disclaimer: Wyoming Rule of Professional Conduct 7.3(b), requires a notification that this is an advertisement.
The Wyoming State Bar does not certify any lawyer as a specialist or expert.  Anyone considering a lawyer
should independently investigate the lawyer’s credentials and ability, and not rely upon advertisement or self–
proclaimed expertise.
Name:
Telephone:
Email:
Comments: