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Editorial 9 MIN READ

Delaware vs Wyoming LLC: the 2018 math

Two and a half years later, the fees are unchanged and the tax code is not

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 7 sections
  1. The fee spine has not moved
  2. What §199A actually did to the comparison
  3. Privacy, now on a federal clock
  4. What Wayfair did to both states equally
  5. Charging-order law, two years later
  6. Who still belongs where
  7. Sources

elaware still charges $300 a year to keep an LLC on the rolls. Wyoming still charges a $60 minimum. The state fee gap that drove the Delaware vs Wyoming LLC calculus in 2016 has not moved in either direction. Almost everything else around those two numbers has.

When we ran the real math in May 2016, the answer was clean: Delaware for investor-facing entities, Wyoming for everyone else. The bones of that answer still hold. The meat on them has changed three times over, and anyone quoting the old comparison without noticing the Tax Cuts and Jobs Act, the Wayfair decision, and the pending federal beneficial-ownership conversation is giving advice that is twenty months stale.

The fee spine has not moved

Start with what has not changed, because this is the part most readers actually came for. Delaware's LLC annual tax is fixed by statute at $300, imposed by 6 Del. C. § 18-1107 on every domestic LLC, due June 1, flat, with a $200 penalty and 1.5% monthly interest for late payment. The filing fee for the Certificate of Formation sits at $90. Neither number has moved since the 2014 increase from $250 to $300.

Wyoming's side of the ledger has been equally sleepy. Wyo. Stat. § 17-29-209 sets the annual report license tax at the greater of $50 or two-tenths of a mill on Wyoming-situated assets, with a $2 online convenience fee on top for most filers and a small paper-filing surcharge for anyone who insists on mailing. For an LLC whose operations and assets sit outside Wyoming, which is most of them, the bill lands at the $52 to $60 range. Wyoming's filing fee for Articles of Organization is $100. None of this has drifted since the last time we ran the numbers.

So the ten-year state-fee arithmetic, setting aside registered agents, still comes out the same way it did in 2016. Delaware costs $90 plus ten $300 tax payments, or $3,090. Wyoming costs $100 plus roughly $55 a year, or about $650. The gap on a decade is still meaningful for a one-person consulting LLC and still trivial for anything venture backed. What has moved is the federal tax overlay those numbers sit inside.

What §199A actually did to the comparison

The Tax Cuts and Jobs Act, signed December 22, 2017, created IRC § 199A, a 20% deduction on qualified business income from pass-through entities. Treasury released proposed regulations in August 2018 under REG-107892-18, 83 Fed. Reg. 40884 (Aug. 16, 2018), which filled in the specified-service-trade definitions and the aggregation rules. We walked through the operational mechanics in February and the service-trade definitions in August.

For the Delaware-vs-Wyoming question, §199A is a wash at the federal level. Both states' LLCs, treated as disregarded entities or partnerships by default, send their income through to the owner's 1040, where the deduction is computed on the owner's total qualified business income regardless of the entity's state of formation. A Delaware LLC and a Wyoming LLC with identical operations produce identical §199A deductions. The state of formation does not enter the calculation. Anyone telling you Wyoming "preserves" §199A better than Delaware is selling something.

Where state of formation does matter is at the state income-tax layer, and that is where Wyoming pulls ahead on paper. Wyoming has no personal income tax and no corporate income tax. An owner who lives in Wyoming and operates a Wyoming LLC receives the §199A federal deduction and pays zero state income tax on the remainder. Delaware has a personal income tax with a top bracket of 6.6% under 30 Del. C. § 1102, and LLC income flowing to a Delaware-resident owner is taxed at that rate before any federal consideration.

The catch is the one every state-shopping founder eventually runs into. State income tax follows the owner's residency and the business's nexus, not the entity's formation state. A Wyoming LLC owned by a California resident still produces California-taxable income. The §199A federal deduction applies on the federal return; California conforms to §199A not at all, because California decoupled in 2018 and taxes the full pass-through amount at up to 13.3% under R&TC § 17041. Forming in Wyoming does not move the operator out of California. Physical presence and the residence rule still govern.

For the narrow population of owners who actually live in Wyoming, or in one of the other no-income-tax states, forming the LLC in Wyoming produces the cleanest §199A outcome available. For everyone else, the formation state is tax-neutral and the choice is made on fees, case law, and privacy.

Privacy, now on a federal clock

Wyoming's privacy pitch has carried most of the qualitative weight in the DE-vs-WY choice since the 1990s. The state does not require members or managers to be named in the Articles of Organization or in the annual report, and the commercial-agent market has built a cottage industry around nominee organizers and manager-managed structures that keep beneficial ownership off the public record. Delaware is less anonymous in practice, because the Division of Corporations does not ask for member names either but the venture- finance ecosystem expects them in cap-table exhibits.

That picture is complicated, for the first time in two decades, by federal beneficial-ownership legislation that has been moving through Congress since early 2017. The Corporate Transparency Act, introduced as H.R. 2513 in the 115th Congress by Rep. Maloney, would require reporting beneficial-ownership information to FinCEN at formation and on change. The bill has not passed. A companion Senate effort has moved through Banking Committee markup but not to the floor. The Treasury-led pressure for beneficial-ownership reporting traces back to FATF's 2016 Mutual Evaluation of the United States, which criticized the opacity of state LLC formations. FinCEN's Customer-Due-Diligence Rule, 31 C.F.R. § 1010.230, effective May 11, 2018, already requires covered financial institutions to collect beneficial-ownership information from legal entities opening accounts.

None of this is law yet at the entity level. What has changed is that the Wyoming privacy argument is now being sold against an actively debated federal reporting regime. A founder choosing Wyoming for anonymity in late 2018 should assume that some version of FinCEN reporting is plausible within the next two Congresses. Wyoming's advantage over Delaware does not vanish if that happens, because state-level privacy still matters for civil discovery and casual searches, but the marketing premium around Wyoming anonymity is priced on a shorter clock than it was when we wrote the 2016 comparison.

What Wayfair did to both states equally

South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), decided June 21, overturned the physical-presence rule of Quill Corp. v. North Dakota and Bellas Hess. States may now impose sales-tax collection duties on out-of-state sellers based on economic nexus. South Dakota's threshold, $100,000 in sales or 200 transactions, became the template. Over twenty states have adopted comparable thresholds since June, and the number grows every few weeks. We walked through the state-by-state thresholds in July.

Wayfair does not care where an LLC is formed. A Wyoming-formed LLC selling $150,000 into California has the same California economic-nexus obligation as a Delaware-formed LLC selling the same dollars. The formation state does not grant immunity from the destination state's sales-tax reach. Anyone who thought Wyoming formation would insulate an e-commerce business from state tax enforcement has found out otherwise this summer.

The operational consequence is that the state-of-formation decision has become strictly less load-bearing than it was in 2016. Pre-Wayfair, a Wyoming LLC with no physical footprint outside Wyoming could credibly argue it owed sales tax nowhere but its home state. That argument no longer runs. Formation saves nothing on destination-state obligations. It saves the Delaware premium relative to Wyoming, on state franchise-tax and annual-report lines, and that is the entire dollar delta.

Charging-order law, two years later

The charging-order argument was the single strongest operational reason to prefer Wyoming in 2016, and it remains so in 2018. Wyo. Stat. § 17-29-503 still makes the charging order the exclusive remedy against a member's interest, full stop, and still extends the rule explicitly to single-member LLCs. Delaware's 6 Del. C. § 18-703 also provides for charging orders as the exclusive remedy, and the Delaware Chancery has been reasonably consistent in enforcing it, but the single-member edge case the Colorado bankruptcy court surfaced in In re Ashley Albright, 291 B.R. 538 (Bankr. D. Colo. 2003) has not been cleanly walled off under Delaware law.

A 2017 Delaware Chancery decision, In re Mullane, is the most recent reassurance on the Delaware side, holding that a charging order is the exclusive remedy against an LLC member's economic interest under § 18-703 even in the closely-held context. It is a trial-court opinion, not the Supreme Court of Delaware, and it does not close the single-member bankruptcy question the way a Wyoming statute does on its face. For asset-protection work, Wyoming still reads cleaner.

This is the one place where the 2016 comparison genuinely still applies unchanged. If you are forming a holding LLC whose job is to insulate rental real estate or a concentrated position from a foreseeable civil judgment, Wyoming is still the stronger pick, and the reason is still the statute's treatment of single-member charging orders rather than any dollar figure.

Who still belongs where

The 2018 decision tree, then, looks like this.

Form in Delaware if institutional investors will ask you to. That answer has not changed and will not. A Series A term sheet that names Delaware is not negotiable in any sense that matters, and converting a Wyoming LLC to a Delaware C-corp during a financing costs three to five thousand dollars in legal and tax work and burns two weeks of counsel's attention you would rather spend on the deal. If there is any realistic chance of an institutional round, start Delaware.

Form in Wyoming if you are an operator or an asset-holder with no institutional capital in your future. The charging-order statute is still the cleanest in the country, the fees are still the lowest among credible-case-law states, and the state has no income tax to layer on top of §199A for Wyoming-resident owners. For a rental- property holding LLC, a family-investment vehicle, a one-person consulting shop, or a foreign-owned single-member LLC filing Form 5472, Wyoming still wins.

Form in your home state if you operate there and raise no outside capital. Neither Delaware nor Wyoming saves you anything once you foreign-qualify at home; you pay two annual fees, keep two registered agents, and buy yourself a shelf of paperwork for no benefit.

§199A does not change this tree. Wayfair does not change this tree. The coming beneficial-ownership regime will not change this tree, though it may narrow the Wyoming privacy premium by a year or two. The fees are the same. The math is the same. The tax code around it has gotten louder, and the right answer has gotten quieter.

Rule of thumb for late 2018: if a future investor will ask where you are formed, file in Delaware; otherwise file in Wyoming, claim the §199A deduction federally, and assume FinCEN will eventually know who you are.

Sources

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