Q: I’m interested in starting a WY close corporation. I expect to have 4-5 shareholders at some point in the future. Does this option still make sense?
Thank you to a client from Wyoming for that great question! A Wyoming close corporation is a corporate entity that can have up to 35 shareholders and is not publicly traded. Starting a close corporation can be a good option for businesses owned by family members, friends, or close business partners. Close corporations in Wyoming enjoy the same liability protection as traditional corporations, but they have the freedom to operate more informally and are not required to have a board of directors or hold annual meetings. We’ll explain how Wyoming close corporations operate.
Wyoming Close Corporation Requirements
Close corporations in Wyoming (aka Wyoming statutory close corporations) are governed by the Statutory Close Corporation Supplement of the WY Business Corporation Act. Here are the basic requirements:
- Must adhere to the policies in their Articles of Incorporation and shareholders’ agreement
- Can have up to 35 shareholders
- Can only transfer shares if all shareholders agree to a buy-sell agreement (with a few exceptions)
- Must make company decisions with the unanimous consent of the shareholders (unless the shareholders’ agreement gives full decision-making power to a single shareholder)
In addition, close corporations in Wyoming may choose to operate as partnerships, meaning they need not have a board of directors, hold annual meetings, or draft written resolutions, as long as these policies are included in the Articles of Incorporation.
Optional provision: Compulsory purchase of shares upon death
If you choose, you can include a provision, permitted in WY Stat § 17-17-114, that requires the corporation to purchase a shareholder’s shares in the event of his or her death. The benefits of this provision are the guarantee that a shareholder’s heirs will be compensated after the shareholder dies, and that the corporation is able to retain control over who is allowed to be a shareholder in the company.
How to Form a Wyoming Close Corporation
The process to form a Wyoming Close Corporation is nearly the same as forming a regular Wyoming corporation. You file Wyoming Articles of Incorporation and check the box “This entity elects to be a statutory close corporation.” The filing fee is the same as for a traditional corporation: $100.
If you want to take advantage of the benefits of a close corporation, such as operating without a board of directors and having a shareholders’ agreement instead of corporate bylaws, you’ll need to include a written agreement to adopt these provisions with your Articles of Incorporation. You can also add these provisions after incorporation by filing a Wyoming Corporation Amendment.
Close Corporation Taxation
Close corporations are taxed as C-corps by default, just like regular corporations. This means that the corporation will be subject to the 21% federal corporate income tax, and shareholders must pay taxes on dividends they receive. Lucky for Wyoming business owners, Wyoming does not have a state corporate income tax or individual income tax.
Close corporations in Wyoming can also elect S-corp status by filing Form 2553 with the IRS. S-corps are taxed as pass-through entities, meaning they do not pay corporate income tax. However, S-corp status requires any shareholder who does work for the corporation to receive what the IRS considers a “reasonable salary,” and salary income is subject to the 15.3% federal self-employment tax. Long story short, it’s a good idea to talk to a CPA before you file to become an S-corp.
Weighing your options? Learn about Wyoming Close LLCs.