In terms of taxes, two of the most important considerations when starting a business are deciding upon an entity structure and where to form the business. This means:
How business income is taxed will also depend on its entity structure, e.g., sole proprietorship, partnership, limited liability company (LLC), C-corporation, or S-corporation.
A sole proprietorship is the default entity structure for a business that has a single owner. A sole proprietorship may be a single-person business or one that is operated by several people. However, it can only have one person who is the legal owner and who accepts all the risks and liabilities of the business.
A sole proprietorship is not considered to be a separate entity from its owner and is, therefore, treated as a disregarded entity for tax purposes. This means that the business's profits and losses are reported on the owner's personal tax return.
A limited liability company (LLC) is a business entity that is formed under state law. LLCs are popular with business owners because they combine the personal liability protection of a corporation with the tax advantages of a partnership or sole proprietorship.
Depending upon whether it has a single owner or multiple owners, an LLC will be treated for tax purposes as either a disregarded entity or as a corporation (if it elects to be treated as a corporation), or as a partnership (if it has 2 or more owners).
Most corporations in the United States are organized as C-corporations. A C-corporation pays taxes on the business’s income and losses at the corporate level. Also, after-tax profits may be taxed as income to its shareholders when it is distributed as dividends, resulting in double taxation.
A partnership is an arrangement between two or more parties to carry on a trade or do business together. Each partner invests funds, assets, labor, or skill for a share in the profits and losses of the business.
A partnership does not pay income tax itself. Instead, any income, deductions, gains, and losses from the business's operations pass through to the partners who must report their respective share of the partnership's income or losses or their own personal tax returns.
A corporation can be structured as either a C-corporation or an S-corporation. The fundamental difference between the two, apart from how they are treated for tax purposes, is that there are no limitations on the types and number of shareholders that a C-corporation may have, nor the classes of stock it may issue.
An S-corporation is a business that is organized as a corporation for legal purposes and then elects S-corporation status for federal income tax purposes. S-corporations are generally not subject to income tax. Instead, their income, losses, deductions, and credits pass through directly to its shareholders, similar to a partnership, avoiding the double taxation that plagues C-corporations.
While in most other states, income derived from pass-through entities like partnerships, LLCs, and S-corporations are subject to the state's personal income tax, and C-corporations are subject to its corporate tax, Wyoming has no personal income tax or corporate income tax.
Many states also impose what is often referred to as a franchise taxinstead of a personal income tax or corporate tax. This tax, which is often levied simply for the privilege of doing business in the state, might be a flat rate or some amount tied to the business's net worth and again will depend on how the business entity is structured. Wyoming does not impose any franchise tax for the privilege of doing business in the state.
In the general absence of a personal income tax, a corporate income tax, or any of the many other taxes that some states impose on businesses, Wyoming only has an annual license fee. This fee is levied against the in-state assets of limited partnerships, LLCs, and corporations doing business in the state.
Wyoming's license fee amounts to $.0002 for every dollar of in-state assets the business has, or $60, whichever is greater. If the total value of the business's in-state assets is under $250,000, the annual license fee is only $60. If more than $250,000, the business's annual license fee will be calculated by multiplying the total value of those assets by .0002.
Wyoming charges a sales and use tax of 4% for which you will need a license to collect if you sell physical goods and/or provide certain types of services. Individual municipalities may add a little more to this sales and use tax, which tops out at around 6%.
Because it has neither a personal income tax nor a corporate tax, Wyoming is widely regarded as one of the most business-friendly states in the country in terms of income. However, if your business is registered and doing business in Wyoming and other states as well, be aware that you may still be obliged to pay personal income tax, corporate tax, and/or other taxes in the other states in which you do business. We recommend collaborating with the experts at Bench to do your books and income tax prep so you can focus on growing your business.
It can be complicated to keep track of all of your tax obligations when you are doing business in multiple states. When this is the case, you would do well to seek the help of a qualified professional. For help with keeping track of your Wyoming business’s tax obligations, or for more information, please contact our office to arrange a free consultation with a reputable Wyoming business law attorney. Reach us by completing the contact form or calling (307) 683-0983 to get started.