The Majors Law Firm, P.C. can assist you and your business with the formation of a Wyoming Limited Liability Company or Wyoming Close Limited Liability Company.
A Wyoming Close Limited Liability Company is similar to a regular Limited Liability Company; however, it is designed for closely held businesses. To learn more about the standard characteristics attributable to both a Wyoming LLC and Wyoming Close LLC, please see our web page on Wyoming Limited Liability Companies.
The Wyoming Close LLC legislation 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, return of capital contributions, and dissolution of the LLC.
Wyoming Close LLC’s are the entity of choice for small family businesses and closely held businesses. Wyoming Close LLC’s can also be a beneficial tool as part of a client’s estate, business and tax 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 reductions. 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 rather the units or shares of 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.
In determining the fair market value of an interest in a closely held business, the value may 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 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 reviewed by a business appraiser to determine exactly what the valuation adjustment or discount should be. The appraiser reviews many issues, including a member’s 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 valuation discount may be.
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 review 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:
Wyoming Statute § 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.
Wyoming Statute § 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 important 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 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.
In addition to the creation of new business entities, the Majors Law Firm, P.C. also assists clients with the management and ongoing operations of the business, including holding annual meetings, mergers and acquisitions, buy sell agreements, asset purchase agreements, license agreements, filing of annual reports, contracts, securities, dissolutions, gifting and business valuations.
Contact the Majors Law Firm, P.C. to learn more about setting up a Wyoming LLC or Close LLC.