Separate Your Children Or Assume All Risk
Attorney · Wilsonville, OR · Member since 2017 · 504 posts · 411 votes
The fact is that not all LLCs are the same. Some are just better for asset protection then others. The best LLC structure is the Series LLC. Like any good parent, we want to protect our children. This is accomplished with the Series LLC by isolating each asset into individual series called "children series" for liability purposes inside a holding company, the parent Series LLC. And then we protect our children even more by hiding those children from being connected to the holding company with an anonymity land trust. This system (Series LLC with Anonymity Land Trust) allows you to stop a lawsuit before it is started, by taking away the chance of recovery. Though the Series LLC is one company, with one filing with the state, and one tax return, each child ‘series' is treated as if it were its own LLC for liability protection.
@Brian Bradley, I agree LLCs are a very important asset protection device. I am not as convinced that Trusts by any name that folks slap on them are of much benefit. If you own property and run it through a management company it is almost impossible to pierce it if you do any kind of proper protocol. I see no point in doing a trust where you are so well protected. Now if you are in fact a hands on investor as probably 98% of the folks on BP are using a "blind " trust is practically useless. You are the guy negotiating the purchase, you are the guy signing the closing papers, you are the guy hiring the contractor or even doing the work yourself. You are the guy interviewing the tenant, you are the guy they call if things need repaired, you are the guy negotiating the sale, you are the guy signing the deed, you are the guy writing the checks, etc. To think putting the property into a blind trust will "hide " your identity is absurd. I have had several lawsuits where folks who did wrong tried these little games and it only took a few interrogatories to sort it out and I can assure you it would not remain hidden in a deposition. I am aware of one guy who lied in a federal lawsuit I was involved in, he went to prison AND lost all of the assets. The claim about using a lien to take the equity out of a property is actually the second best way to get the corporate veil pierced in my experience, it is called under capitalization, and fraud. The money you pull out is very easy to trace in the banking world. While I also like the series LLC in theory, the book keeping can be a nightmare for those with a lot of rentals. I only have a little over 30 doors and maybe 5 entities and it is already getting to be a pain to keep them all separated. While Wyoming has the series LLC now we do not have an actual case on them yet. We do have some very strong case law on upholding the LLC shield however. There is actually a fair number of cases on real estate LLCs, although the first LLC in Wyoming was a partnership between two oil companies. I also love how the IRS removed many of the limitations on LLCs about 20 years ago so you no longer have to limit their life to no more than 30 years or meet the 5 bullet test to keep your LLC status. Now in Wyoming even the meeting requirements are pretty much done away with, but not corporations unless you are a limited corporation. I really like limited LLCs. I suspect they are really better than a plain LLC for protecting assets. Thanks for talking about LLcs, I think it is important for folks to have them, unfortunately many have to buy in their own name for the first few properties because of the better terms that personal loans get through things like Fannie May or Freddie Mac.
@Jerry W. and I said lets jump on a phone call and talk. Everything with asset protection is client specific. I did not say you cannot understand, but that you are making very large assumptions. I did answer your hypothetical and questions. Very length actually. Virtually paragraph by paragraph. Some of the hypothetical was based on a wrong idea of what a land trust is or how used and drafted etc which you said you are not familiar with. I think your view of asset protection and mine are just different. And you are trying to use something you are familiar with and apply it to a land trust situation that you don't. And we have gone over the land trust a lot. We both agree on the benefit of the LLC or S-LLC benefit of corporate structure. You are just skeptical of a land trust. Which is fine, and then the method of attacking damages. What is important in your hypo is not the facts or injury etc, just the means of how the firm will get to the damages.
@Mark S. I agree insurance is very important and a must have, and umbrella insurance. Its one of the Pillars, But you must understand that is is false security to think it will not be challenged as they are a lot. Hence why plaintiffs lawyers have to sue insurance providers and fight for their clients claims.
@Matthew Olszak I did not say it is well established. I said that it exists based of your stupid comment saying it does not. AND told you where to go and find it. And you are only talking about bankruptcy. Petition may be filed by any "person." 11 U.S.C. § 109 (a). In addition to those enumerated as eligible, "other similar entities are as well." See In re ICLNDS Notes Acquisition, LLC, 259 B.R. 289, 292 (Bankr. N.D. Ohio 2001) holding an LLC eligible because it draws its characteristics from both corporations and partnerships and, therefore, "is similar enough to those entities to be eligible." Based on the definition, an LLC should be treated as a "corporation" under the Bankruptcy Code. Kennedy, Countryman & Williams, Kennedy, Partnerships, Limited Liability Entities and S Corporations in Bankruptcy § 2.12 (2002); Ribstein and Keatinge, Ribstein and Keatinge on Limited Liability Companies § 14:4 (December, 2006). See also In re 4 Whip, LLC, 332 B.R. 670 (Bkrtcy. D. Conn. 2005) holding even a de facto (imperfectly formed) LLC may be a debtor in bankruptcy. Series LLC are LLCs.
Even the SEC has laws established for Series LLC and separation out of assets.
You are just wrong. Sorry.
@Matthew Olszak I did not say it is well established. I said that it exists based of your stupid comment saying it does not. AND told you where to go and find it. And you are only talking about bankruptcy. Petition may be filed by any "person." 11 U.S.C. § 109 (a). In addition to those enumerated as eligible, "other similar entities are as well." See In re ICLNDS Notes Acquisition, LLC, 259 B.R. 289, 292 (Bankr. N.D. Ohio 2001) holding an LLC eligible because it draws its characteristics from both corporations and partnerships and, therefore, "is similar enough to those entities to be eligible." Based on the definition, an LLC should be treated as a "corporation" under the Bankruptcy Code. Kennedy, Countryman & Williams, Kennedy, Partnerships, Limited Liability Entities and S Corporations in Bankruptcy § 2.12 (2002); Ribstein and Keatinge, Ribstein and Keatinge on Limited Liability Companies § 14:4 (December, 2006). See also In re 4 Whip, LLC, 332 B.R. 670 (Bkrtcy. D. Conn. 2005) holding even a de facto (imperfectly formed) LLC may be a debtor in bankruptcy. Series LLC are LLCs.
Even the SEC has laws established for Series LLC and separation out of assets.
You are just wrong. Sorry.
Based on the definition, an LLC --SHOULD BE-- [emphasis added] treated as a "corporation".
You've yet to present any firm case law that a series LLC child is considered a separate entity under federal law. If I were your client I sure wouldn't want to be the one to have to pay to try to prove your theory. Much cheaper and more reliable to just follow proven methods.
Minutes are not required for LLC, so are there other documentation required? Operating agreement, any amendments and annual report to state are the only items I am familiar with.
Early on, my attorney recommended separate bank accounts for LLC. After a few years, there does not seem to be much emphasis on separate bank accounts for single member (disregarded entity). Separate bookkeeping for LLC is still necessary for my CPA.
Could you give a little more info on "underfunded"?
I have a corporate tenant that has set each of their stores as a LLC, my lease is with the individual store LLC. The rent monthly rent is paid by the corporation and all correspondence, etc is with the corporation not LLC.
Thanks, again for all the information.
As usual a little information begs more questions!
@Rodney Blackwell it depends how the LLC is structured if they do or not. SO I could not tell you how they are structrues, but default law is that at least one annual meeting is required unless stated otherwise. So do to the flexibility of the LLC with formalities it depends on what they decided those are. What does the operating agreement say? Are they making annual fillings? LLC meeting minute with dates etc, Undercapitalization occurs when a company does not have sufficient capital to conduct normal business operations and pay, or not enough cash flow, unable to access forms of financing its change of bankruptcy is high by not servicing debts etc.
@Brian Bradley, what @Rodney Blackwell is referring to , I think is unique to LLCs in some states and is like Limited corporations. In Wyoming LLcs are not required to keep minutes and have meetings. I have no idea if things are that way in other states. Fail to do that in a corporation will get you into trouble unless it is a Limited Corporation. things have changed so much with LLCs from when they first started.
@Jerry W. and @Rodney Blackwell will depend on your specific states LLC formalities requirement of where they are being sued. Yea some states don't require it, but if the articles or bylaws or operating agreement they draft states that they do need meetings, then that is going to be needed in addition. Good luck Rodney.
@Bob Floss II I agree, lots of states are starting to compete. Competition is good. NV, TX, DE, WY, even AZ and FL are stepping it up.
@Brian Bradley. let me give you an example of my idea of an asset protection plan. First form an LLC to buy property. The owner must personally guarantee the mortgage in order to get the mortgage. Only the husband is in the LLC, not the spouse. Since there is not a lot of money the managing member is hands on. it cannot be helped. You can opt to form a second holding or management company who by contract does the managing of the rentals. there is of course insurance. Now the dangerous part of this plan is the hands on participation of the real owner, say Tom Smith. If he runs the business right his LLC will fend off personal liability to Tom, but nothing can protect the asset itself. So say we have a claim or suit filed against the LLC and they find a way to add Tom to the suit. If they win, they can attach the property if they filed against the LLC. If they only filed against the holding company or management company only those assets are at risk. Now the big risk is if they sue Tom personally. What happens to his house, car, bank account, etc.?
now if the claim was for Tom driving drunk and hurting someone he is personally liable. If the claim was for say tripping on a damaged sidewalk, Tom is probably not personally liable, but maybe you can get the management company and maybe the LLC itself. If the claim was code defective conditions rendering them unsafe you might get all 3 of the entities. I would try to keep various properties separated by series LLcs or separate LLcs, so liability does not splash over onto different properties. if you win against Tom You can only get charging orders on ownership of the LLCs but you have his personal assets.
So you put all property not in the LLcs into joint tenant by the entireties ownership, like houses, cars, office buildings, etc. Since the spouse is not part of the LLC or holding company you cannot get a successful lawsuit against her. Since the house and other valuable are owned as Tenants by the Entireties you cannot attach the house or other property without the wife also owing the debt. The weakness is that the wages of Tom could be garnished if there is a judgement against him. However the land in other LLCs are spared anything but a charging order, and the house and other property in Tenants by the Entireties is spared. you could add another member to the LLC like a friend, for a 1% share to make it a multimember LLC instead of a single member LLC.
How does that sound?
If Tom is buying the properties and getting loans, and doing the maintenance and renting them, I see no way to insulate him from personal liability for many kinds of claims. I can see protecting his other assets.
What would you do differently to protect Tom and please explain how it would work if you can.
@Matthew Olszak I would advise my clients on the legal jurisdiction system. If you are in bankruptcy court then bankruptcy law applies and I would collaborate with a Bankruptcy lawyer. But Siemers V. Wells Fargo & Co. (2006) WL 3041090 (N.D. Cal 2006) the court accepted the SCC position that each series of a series investment should be treated as a separate issue under the investment company. In re Mutual Funds Investment Litigation, 519 F.Supp. 2d 508 (D. Md. 2007). A lot of Series LLC law will be found relating to mutual funds since that was what they were first create for. A lot will come down to whether a series that is "not defined as an (entity)" will then be a person.
To the other part of your question, I would then tell my client about subject matter and diversity jurisdiction of Federal and State Courts. First if you are a plaintiff you want to try to sue in state court for better awards. If a defendant federal courts. Now lets say you are being sued in federal court, since that is your obsession, what law would the court apply? This is the first analysis and a headache. But Eries Railroad v. Tompkins 304 U.S. 64 (1938) leads this. Under the Erie doctrine, federal courts sitting in diversity “APPLY STATE SUBSTANTIVE LAW an federal procedural law.” Gasperini v. Ctr. For Humanities, 518 U.S. 415, 4247, (1996).
Then this goes into a crazy analysis of diversity jurisdiction and if the parties even belong in Federal Court based on diversity jurisdiction or tossed out back to state court. So your constant question of a federal court case of a Series LLC is not the correct questions since it is not the analysis. Federal Courts will use and apply the state substantive law. The State Codes and State LLC independent liability shields they have established, and then simply use Federal Procedural Law. And if they can't sustain a federal diversity suit, it goes back to state court.
So, again you are wrong. But the question was good, even though asked contentiously and making unsubstantiated claims or statements.
Jurisdiction gives a federal court the power to hear a case. Jurisdiction matters at the outset of a lawsuit. It matters during discovery. It even matters after summary judgment. Jurisdiction matters because federal courts are courts of limited jurisdiction. State courts, however, are courts of general jurisdiction, meaning they hear many types of cases. But federal courts may only hear specific cases. So first you have to be able to properly get into federal court. For purposes of diversity jurisdiction, “a limited liability company is a citizen of any state of which a member of the company is a citizen.” Rolling Greens MHP, L.P. v. Comcast SCH Holdings, L.L.C., 374 F.3d 1020, 1022 (11th Cir. 2004). Then lets assume they have federal diversity jurisdiction now and not just get tossed out.
LLC and jurisdiction issues is a huge analysis. The costs of a doomed foray into federal court should fall on the lawyers who failed to do their homework, not on the hapless clients. . . . The best way for counsel to make the litigants whole is to perform, without additional fees, any further services that are necessary to bring this suit to a conclusion in state court, or via settlement. That way the clients will pay just once for the litigation. Belleville Catering Co. v. Champaign Marketplace, LLC, 350 F.3d 691, 692 (7th Cir. 2003),
In 1996, three unreported federal district court decisions suggested that the corporate tests do apply to LLCs, but since then every reported decision at both the district and circuit court levels has acknowledged that Carden controls. A recent Eight Circuit opinion is illustrative: "We recognize numerous similarities exist between a corporation and an LLC, but Congress is the appropriate forum to consider and, if it desires, to apply the same citizenship' rule for LLCs as corporations for diversity jurisdiction purposes. This issue appears resolved by Justice Antonin Scalia's analysis in Carden." GMAC Commercial Credit LLC v. Dillard Department Stores Inc., 357 F.3d 827, 828 (8th Cir. 2004).
Carden is the law and the case's applicability to LLCs is now beyond doubt and possibly even beyond "a nonfrivolous argument for the extension, modification, or reversal of existing law." Fed. R. Civ. P. 11(b)(2). This state of the law has some important practical consequences. In general:
In any suit between an LLC and a third party (that is, not a member), diversity jurisdiction depends on the citizenship of each LLC member at the time the lawsuit is filed.
In any suit between an LLC and a member, diversity jurisdiction is impossible.
In an LLC-related suit among members of an LLC, diversity jurisdiction depends on whether the LLC is an indispensable party (even assuming the litigating members are diverse).
In any derivative lawsuit brought on behalf an LLC, diversity jurisdiction depends on the citizenship of each LLC member at the time the lawsuit is filed and is impossible in all but very limited circumstances.
Hence, subject matter and diversity matter jurisdiction to answer your question.
@Jerry W. Yes I agree. That is a good set up and essentially the way we do things, The only additional add on, which is not necessary, but adds an additional layer, like insurance, is the use of a land trust. Because it adds another layer of separation of ownership. You and I are not at all far apart on what we are talking about. It is just the use and benefit of a land trust or any other type of trust that are typical of asset protection firms.
@Mark S. it implies nothing but states a truth about insurance. Is insurance important? Absolutely. Should you have it. Absolutely. Should you negotiate your own terms, a must. (though most don't or even know they can), Should you rely only on insurance as a protection method? NO absolutely not. Depending on the damages alone the policy will have a max, and if the claim is challenged or denied, OHH boy, you now wish you had something in addition to that 'security blanket.' it is not patently false to state the business structure and methods of the insurance industry.
@Brian Bradley this paragraph is one I don't get.
Another misconception is not understanding how Trusts work. Trust work by separating the grantor / settlor (you) from ownership of the assets. It is easy to explain a land trust and how it is used. A real estate land trust is just one of the many types of trusts. A Trust, be it your estate trust or land trust, is any agreement where one party holds property for another party's benefit. The owner of the property never gives up control of the assets, but the trustee becomes the owner of the property. The function of the land trust is to shield the asset owners by separating the grantor from ownership. The anonymous land trust owns the Series LLC as well as serve as the Title Holding Trusts for your real estate assets. This is the power of trusts and why trust are so strong and vastly used. When assets are placed into a trust, they are separate from the settlor, therefore if the settlor is sued, only the individual's personal assets can be pursued. Even the trust assets that are being distributed to the beneficiary are off limits through protective provisions (legal language) in the trust deed.
How do you make a trust asset being distributed to the beneficiary off limits through protective provisions? without it being a spendthrift provision. My understanding of trusts is that you can add the part about no beneficiary may anticipate or pledge any assets and not creditor may attach the assets for the benefit of the beneficiary, etc.
My understanding of that a spendthrift provision is broken if you give the beneficiary of the trust any control over the assets. How can the beneficiary control it and not have it liable for the beneficiaries debts? perhaps you could paste a copy of that language. that is one of the parts I have a problem with. Who would be the Trustee of the Trust?
@Jerry W. and @Brian Bradley The LLC/Asset Protection issue is by far one of the most discussed topics on BP which LACKS any definitive and clear advice due to multiple biased opinions being thrown on the table.
People are either throwing up flowcharts that subjectively attempt to advise people about LLCs, while others are adamantly insisting that “due on transfer clauses” kick in when transferred using Warranty or Quitclaim Deeds, or people are unequivocally stating LLCs are a joke altogether. Then there’s the whole Anderson Business Advisors/WY Charging Order Protection topic covered in-depth in an earlier BP post; which has several similar discussion points as this current post; https://www.biggerpockets.com/forums/92/topics/244732-anderson-business-advisors?page=1
Thanks to both of you for unpacking and fleshing this out for the rest of us – aside from a few heated disagreements you’re having.
I hope in the end that both of you can come to some sort of an agreement which will help the rest of us! OTHWERWISE WE’RE BACK TO SQUARE ONE; opinions and flowcharts and subjective biased advice.
Maybe Attorney @Scott Smith can chime in on this topic as well.
Thanks gentlemen.
@Jerry W. There are lots of types of trusts. So all the different provisions etc that can be used for different trusts add up. The devil is really in the detail in the overall drafting of the land trust and series llc or any trust type. The basic gist of it with the land trust and series LLC is that in the land trust, the grantor of the trust is the Child Series of the Series LLC (Company zyx Series A) and then the named beneficiary is (company xws Series A) and then the client is the trustee. The attorney with the firm is the initial trustee for the filing, and then automatically resigns upon transferring of title of the property into the trust and is replaced by the subsequent named trustees. If the trust is sued, the asset of the child series is the one that they can get to. I can't copy and past our land trust or specific provision since it's like asking somebody at IBM or Apple to copy and past some of their code and send to you to see how they code their computers.
@Matthew McNeil thanks. I think Jerry and I are mostly saying the same thing. Their are benefits of LLC and Series LLC. benefits of insurance, and more than one way and options on how to set something up for protection. The Series LLC and land trust is one of them. We are now just talking about land trust and their benefits.
A real mind blower is then Self-Settled Irrevocable Spendthrift Trusts. That topic alone is worth its own thread.
Has anyone used the Nevada LLC to protect from personal liability?
A series LLC still requires separate bookkeeping and separate bank accounts per "sub" entity in order to maintain that corporate veil.