An explosion of LLCs: the Wyoming angle

US INCORPORATION TRENDS: Part 3

Article by Ana Muñoz Padrós & the OpenCorporates Insight Team

What’s behind Wyoming’s spectacular rise as a jurisdiction of choice for LLCs?

In the first two parts of this series analysing incorporations in the US (see here and here), we explained that the data (taken from OpenCorporates‘ comprehensive database of US legal entities) showed two clear trends: one, Wyoming has had an explosion of legal entity formations, with the number being incorporated tripling over the past 5 years, and last year overtaking Delaware for per-capita incorporations; and two, that LLCs have over the past 10 years overwhelmingly become the dominant type of legal entity formed in the US.

We also showed that there is no obvious source for Wyoming’s rise – it does not appear to have come by taking incorporations from other states, at least not entirely, and while incorporations at Delaware have plateaued, even declined a little, this is not nearly enough to account for the huge rise in the Wyoming’s incorporations.

Wyoming is the least populated state in the US, with fewer than 450,000 adults. It’s a small market, a small economy (only Vermont is smaller) and mining still plays an important role. So why did 166,960 entities, 92% of them LLCs, choose to incorporate there in 2023?

Treemap showing the proportion of LLCs incorporations per 1000 adults in 2023. The square size shows proportion, figures are LLCs per 1000 adults per state, according to US 2020 decennial data. Download this data

In 2023, Wyoming had more LLCs per 1000 adults than any other state.

As a reminder, here’s a line chart featured in our first post showing incorporations per capita and by state. Each line is a state, including DC. Wyoming and Delaware as the clear outliers. Population: U.S. 2020 Census decennial data. Download the data

In 2023, Wyoming overtook Delaware with a historical 42% increase in incorporations per 1000 adults

Possible explanations

One possible explanation could be a first-mover advantage: Wyoming was the first state to create the LLC in 1977, and maybe this should put it in pole position for all the LLCs being created. However, the figures and history don’t bear this out. 20 years ago, LLCs were still a relatively small part of incorporations, and all states could incorporate LLCs.

Furthermore, many of the LLC laws were based on a common standard – the Uniform Law Commission’s 1996 Limited Liability Company Act template. Everything was to play for, and advantages should go to the biggest players. Even 3 years ago, while Wyoming had grown to have more per capita incorporations than any other state other than Delaware, it still was way behind Delaware in incorporations, including LLCs, where (Delaware had 230, LLC incorporations per 1000 adults, Wyoming 130).

Another explanation could be a flurry of new businesses based in Wyoming, for example, new mining companies, or a rash of crypto-currency companies or DAOs (Decentralized Autonomous Organizations). Again, there’s nothing in the data to support this. A rise of this scale in real-world activity such as mining would show up in a significant way in GDP figures, and there’s nothing to show that’s the case, with growth being in the middle of the range for the US states. And given that DAOs need to have to have DAO or LAO in the name, and at time of writing there were fewer than 100 of these. Crypto? Again, it seems not, with just a few hundred entities with crypto-related terms in the name.

A comparison between the development of new LLCs and the GDP of Wyoming. The left chart’s red line represents the number of LLCs and the black line of the right chart represents the real gross domestic product of Wyoming in billion US dollars.

Download the data of the left chart (source : OpenCorporates)

Download the data of the right chart (source : BEA.gov, Statista)

Wyoming: No correlation between increase in LLC incorporations and Wyoming’s GDP

Or maybe it’s that vibrant new companies are incorporating in Wyoming instead of say Delaware, and doing business around the US. Again, the data doesn’t support this. As we explained in our webinar on US foreign LLC registrations (aka branches), registration of an out-of-state entity (what we call a ‘branch’) happens when there’s business activity there, and specifically when business activity reaches a given threshold (e.g. performing significant business activity such as opening an office or employing staff in the state).

And so branch registrations are a strong indicator of business activity, and so you’d expect to see a lot of foreign LLC for Wyoming-incorporated LLCs. This looks more promising, with significantly more foreign LLC registrations of Wyoming companies compared with the average. But still, and correcting for population size and number of companies, Delaware outnumbers Wyoming by 2:1.

So, what’s the answer? Well, let’s look at what the data says about what’s being incorporated, compared with the rest of the country.

Four area charts showing the number of incorporations of LLCs and other entity types per 1000 adults (US 2020 census data). The blue areas represent LLCs per 1000 adults in, left to right, Wyoming and Delaware. The golden areas represent other company types in the same jurisdictions. Download the data

LLC growth in Wyoming, Delaware and the rest of the US

As you can see from the above graphs, Wyoming’s growth has come disproportionally from LLCs, and not other entity types. In fact, the growth in other entity types in Wyoming over the past 10 years is not too different from the growth in other entity types in Delaware, and indeed the rest of the US; it’s the Wyoming LLC form that is almost exclusively responsible for the state’s growth. So what are the benefits from incorporating an LLC in Wyoming vs any other state, and particularly over Delaware LLCs, which is generally regarded as the jurisdiction of choice for incorporations.

Why Delaware?

First, it’s worth explaining why Delaware became the jurisdiction of choice in the US (see Hal Weizman’s What’s the Matter with Delaware? for a detailed walkthrough of the history). There are multiple reasons, including:

Legal Certainty. Delaware’s Court of Chancery, was established in 1792, and particularly since 1897 has become expert in corporate disputes, and as a consequence has generated vast amounts of case law. The two aspects – expert judges focusing on corporate cases and case law – bring a high degree of certainty to businesses incorporated there. This is particularly important in our VC-driven tech-powered world, where investors and entrepreneurs are entering into complex agreements
History. A lot of it. It was back in 1899 that Delaware enacted a general corporation law modeled on New Jersey’s, who had designed it to attract incorporations from New York businesses. And it was 1913 that New Jersey repealed that corporate law, under Governor Woodrow Wilson, who became president that same year. While there is some academic debate, about whether New Jersey lost the battle, or Delaware won it, since the early 20th century Delaware has been the go-to jurisdiction.
Taxes. Delaware doesn’t charge corporate income taxes on income generated out of state, and instead charges a franchise tax for the privilege of incorporating there. This is a flat fee of $300 for LLCs, and on a sliding scale based on share capital up to a maximum of max $250,000 for listed corporations.
Opacity. This is a double-edged sword for Delaware, as opacity is a friction that damages trust. It is often said that it’s easier to set up a company in Delaware than get a library card, and over the years, there have been many news stories linking Delaware companies with criminal activity of various sorts. However, the relative opacity of Delaware entities is still seen as a selling point.
Expectations. Companies incorporate in Delaware because it’s the norm. Everyone does it. If you’re a tech start-up looking for VC funding and choose a different jurisdiction, expect a lot of questions and push-back. If you’re a foreign corporation setting up a subsidiary in the US, your lawyers will be much more familiar with the laws and processes for Delaware. And, of course, as every business knows, there’s little point in having battles that don’t bring benefits.

There are also additional reasons in certain sectors, including the balance between shareholders and managers, but the upshot is, there are some pretty compelling business reasons to incorporate in Delaware, of which the strongest, and most defensible is the first, legal certainty (see this comparison with competing jurisdictions in light of Tesla’s move to Texas).

The particular attractions of the Wyoming LLC

So, what is it about Wyoming LLCs that is leading to so many of them to be created? There are two ways to answer that. The first is the legal analysis, the second is how they are sold. Let’s start with the second.

Here’s how one company formation agent describes the benefit of Wyoming LLCs:

No state income taxes
Asset protection and limited liability
Members nor Managers are not listed with the state
Best asset protection laws
No citizenship requirements
Perpetual life
Transferability of ownership
Ability to build credit & raise capital
Number of owners is unlimited
Lower startup costs

Let’s unpick these a little. While many of them are at odds with the basics of partnerships – perpetual life, transferability of ownership, and no limit on owners (members), including only one member – they are not unique to Wyoming, and even the zero state income taxes and opacity are mirrored by Delaware. One thing that has been getting a lot of attention, however, is the “asset protection”, which is actually mentioned twice in this list.

Wondering about what that asset protection actually means? Here’s how another agent explains it:

“Wyoming LLCs enjoy two forms of asset protection whereas most other states provide at best a limited version of one form. These laws were designed to protect debtors, be anti-creditor, and attract business.

The form other states offer is called the corporate veil. The business is responsible for its liabilities and its debts, not the owners. This means, the creditors of a Wyoming Limited Liability Company cannot pierce the corporate veil and seize the owner’s assets.

For additional protection, Wyoming wrote specific statutes extending the corporate veil to single-member LLCs. Other states may disregard your company if you are the only owner, thus leaving you liable for business debts. Wyoming’s laws are written to help prevent this. This is also beneficial for holding companies and subsidiaries because each subsidiary has one member, the holding company.

The second form of asset protection protects LLC assets from personal creditors. This prevents personal credit problems from shutting down your business. A personal creditor cannot seize or vote your membership interest. Your company may continue making money safely inside the company.

The creditor may attempt to attach to distributions, but you are not obligated to make distributions, or you may make distributions to nominees or other companies. This serves to minimize what your creditor has access to and strengthens your hand during negotiations. This is frequently called charging order protection. Learn more about Wyoming limited liability companies and asset protection here.”

The link, by the way, is worth following if you’re a legal geek, describing how LLCs can be layered and combined with Asset Protection Trusts to be immune from creditors. In plain English, this means if structured correctly, Wyoming LLCs and the people who own them can be immune from court judgments from companies or people that have been wronged by them. Combined with the opacity – which means that it’s almost impossible to know who owns what LLC, what assets a particular LLC owns, and how the LLC is connected with Asset Protection Trusts or other LLCs – and you have a potent cocktail meaning that your redress from the courts for wrongdoing is pretty much nil. Oh, and as that link makes clear, if you do win a judgement against an owner of a Wyoming LLC, you are likely to have to pay tax on the amount you’re owed, even though there’s very little chance of ever getting it.

That’s all for today. In our next post, we will dig deeper into the Wyoming angle: the recent legal reforms that have propelled LLCs in the Cowboy State, how this entity type is marketed internationally, and why it appeals to organised crime.

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