Hi guys,
Could you please help me out?
Everybody keeps saying how if a husband and a wife own an LLC it is still considered as one member LLC.
Also, its easy to pierce the corporate veil of one member LLC, and courts sometimes treat a one member LLC as an individual.
So, I can put as a second member another LLC, but what if that LLC is a one member? In other words, in I own an LLC that is two member LLC (one is me and another member is another LLC that has ony one member, who happens to be me again) would not court consider it as one individual?
So is there a way around it?
Thank you!
If the issue is piercing the corporate veil, adding a member will not help you. There's a lot of other issues involved.
I had a business in an LLC, purchased it from the married couple who had it in an S Corp. The S Corp and them were personally sued. My involvement was my employees had to take time off the give court depositions on a lawsuit for over $2 million. They worked for them before I took over. Asked attorneys in the case if the corporate view was pierced. The answer was "NO", because the couple were personally involved in managing the business. Were they? I was allowed the opportunity to observe the business before buying it, and the husband spent most of the day strolling around the neighborhood and reading the papers while he was there. Be that as it may, the court allowed the case to proceed against them because of their personal involvement.
Outcome of the case? The couple retired to Florida from NY, put all the money into a home protected by the state's Homestead laws, so the plaintiffs settled for whatever they can from the insurance.
While I had the business in an LLC, there was a slip and fall at the business, and the customer got an attorney after me. He threatened lawsuits and all kinds of things. At first, I had the correspondence sent to me. But when the amount they're looking for went up to over $10,000, I told them to send everything to my insurance. I got liability insurance for my LLC and an endorsement that covers me personally. Nine months went by and the customer came back to me crying that his attorney stopped answering his calls. Reason why? It's too much work for a claim of measly $10,000. The insurance company had a case number, I checked, and they tell me they received correspondence from the attorney and it's being looked at. Haha. I told the customer to hire another attorney that's not so lazy. Never heard back.
Bottom line, the corporate veil will be pierced in any event. You're the alter ego of the LLC. All they have to ask is what this dummy partner in the LLC does, and it would be case over. With an insurance company, attorneys will not touch the case unless they get a big payday. Bottom line, you're wasting your time.
My experience is that insurance worked better than an LLC.
If a second person is on an LLC it is considered a multi-member LLC and is taxed as a partnership.
In community property states, you can treat a multi-member LLC, where the only members are a husband and wife, as a single member LLC for tax purposes.
If the issue is piercing the corporate veil, adding a member will not help you. There's a lot of other issues involved.
I had a business in an LLC, purchased it from the married couple who had it in an S Corp. The S Corp and them were personally sued. My involvement was my employees had to take time off the give court depositions on a lawsuit for over $2 million. They worked for them before I took over. Asked attorneys in the case if the corporate view was pierced. The answer was "NO", because the couple were personally involved in managing the business. Were they? I was allowed the opportunity to observe the business before buying it, and the husband spent most of the day strolling around the neighborhood and reading the papers while he was there. Be that as it may, the court allowed the case to proceed against them because of their personal involvement.
Outcome of the case? The couple retired to Florida from NY, put all the money into a home protected by the state's Homestead laws, so the plaintiffs settled for whatever they can from the insurance.
While I had the business in an LLC, there was a slip and fall at the business, and the customer got an attorney after me. He threatened lawsuits and all kinds of things. At first, I had the correspondence sent to me. But when the amount they're looking for went up to over $10,000, I told them to send everything to my insurance. I got liability insurance for my LLC and an endorsement that covers me personally. Nine months went by and the customer came back to me crying that his attorney stopped answering his calls. Reason why? It's too much work for a claim of measly $10,000. The insurance company had a case number, I checked, and they tell me they received correspondence from the attorney and it's being looked at. Haha. I told the customer to hire another attorney that's not so lazy. Never heard back.
Bottom line, the corporate veil will be pierced in any event. You're the alter ego of the LLC. All they have to ask is what this dummy partner in the LLC does, and it would be case over. With an insurance company, attorneys will not touch the case unless they get a big payday. Bottom line, you're wasting your time.
My experience is that insurance worked better than an LLC.
You have two kinds of protection by using entities like LLC.
The inside protection: any liability coming from inside the LLC, will not extend outside of it and you personal property won't be at risk.
The outside protection: any liability arising from you personnaly should not extend to the asset inside the LLC.
The inside protection is generaly the same in every state. However, if you do something stupid or illegal as a member or employee of the LLC, you may also be personnaly liable. Also if you did not treat your LLC as a separate entity (mixing of personal account, lack of proper documentation or filing, etc...) you may pierce the veil of the entity and it would be disregarded by the court.
The outside protection varies between states. The best protection available is when the charging order is the only remedy (ie, any creditor can only get distribution made out of the LLC if any, but can't force the LLC to foreclose or have an active participation in its operation, but still has to pay all taxes due even if no distribution has been made).
A lot of states don't have the charging order as sole remedy and a judge may order the LLC to foreclose. In case of a multi-member LLC, showing that another member would be harmed by the forclosure may help to avoid this judgment. But the other member should be completely unrelated from you. Some state like Florida have the charging order as sole remedy for multi-member LLC, but not for single member (since FTC vs Olmstead). Other states like WY have charging order for both.
So as a general rule, multi-member LLC have better liability protection than single-member, but you may be ok in some state.
Different ways to get the added multi-member protection is either to have single member LLC owned by another single or multi-member LLC in another state where the charging order is the sole remedy, or to add a minority second member like a corporation, an irrevocable trust, another LLC, a child, a spouse or another family member.
You have two kinds of protection by using entities like LLC.
The inside protection: any liability coming from inside the LLC, will not extend outside of it and you personal property won't be at risk.
The outside protection: any liability arising from you personnaly should not extend to the asset inside the LLC.
The inside protection is generaly the same in every state. However, if you do something stupid or illegal as a member or employee of the LLC, you may also be personnaly liable. Also if you did not treat your LLC as a separate entity (mixing of personal account, lack of proper documentation or filing, etc...) you may pierce the veil of the entity and it would be disregarded by the court.
The outside protection varies between states. The best protection available is when the charging order is the only remedy (ie, any creditor can only get distribution made out of the LLC if any, but can't force the LLC to foreclose or have an active participation in its operation, but still has to pay all taxes due even if no distribution has been made).
A lot of states don't have the charging order as sole remedy and a judge may order the LLC to foreclose. In case of a multi-member LLC, showing that another member would be harmed by the forclosure may help to avoid this judgment. But the other member should be completely unrelated from you. Some state like Florida have the charging order as sole remedy for multi-member LLC, but not for single member (since FTC vs Olmstead). Other states like WY have charging order for both.
So as a general rule, multi-member LLC have better liability protection than single-member, but you may be ok in some state.
Different ways to get the added multi-member protection is either to have single member LLC owned by another single or multi-member LLC in another state where the charging order is the sole remedy, or to add a minority second member like a corporation, an irrevocable trust, another LLC, a child, a spouse or another family member.
Thank you!
1) Can you add a minor child?
2) Lets say I am the member of an LLC and then I add as a member another LLC (in which I am a single member) , would not court consider it all as one person (me) ? In other words, the court would look at it like there is no any LLCs at all?
If the issue is piercing the corporate veil, adding a member will not help you. There's a lot of other issues involved.
I had a business in an LLC, purchased it from the married couple who had it in an S Corp. The S Corp and them were personally sued. My involvement was my employees had to take time off the give court depositions on a lawsuit for over $2 million. They worked for them before I took over. Asked attorneys in the case if the corporate view was pierced. The answer was "NO", because the couple were personally involved in managing the business. Were they? I was allowed the opportunity to observe the business before buying it, and the husband spent most of the day strolling around the neighborhood and reading the papers while he was there. Be that as it may, the court allowed the case to proceed against them because of their personal involvement.
Outcome of the case? The couple retired to Florida from NY, put all the money into a home protected by the state's Homestead laws, so the plaintiffs settled for whatever they can from the insurance.
While I had the business in an LLC, there was a slip and fall at the business, and the customer got an attorney after me. He threatened lawsuits and all kinds of things. At first, I had the correspondence sent to me. But when the amount they're looking for went up to over $10,000, I told them to send everything to my insurance. I got liability insurance for my LLC and an endorsement that covers me personally. Nine months went by and the customer came back to me crying that his attorney stopped answering his calls. Reason why? It's too much work for a claim of measly $10,000. The insurance company had a case number, I checked, and they tell me they received correspondence from the attorney and it's being looked at. Haha. I told the customer to hire another attorney that's not so lazy. Never heard back.
Bottom line, the corporate veil will be pierced in any event. You're the alter ego of the LLC. All they have to ask is what this dummy partner in the LLC does, and it would be case over. With an insurance company, attorneys will not touch the case unless they get a big payday. Bottom line, you're wasting your time.
My experience is that insurance worked better than an LLC.
Thank you!
Was the liability insurance for your LLC and endorsement that covers you personally as one policy? Or is it two different policies?
If a second person is on an LLC it is considered a multi-member LLC and is taxed as a partnership.
In community property states, you can treat a multi-member LLC, where the only members are a husband and wife, as a single member LLC for tax purposes.
Well, its just me...And my minor son...I do have a sister that lives in a different country. I wonder if I could use my sister who is a non US citizen?
If the issue is piercing the corporate veil, adding a member will not help you. There's a lot of other issues involved.
I had a business in an LLC, purchased it from the married couple who had it in an S Corp. The S Corp and them were personally sued. My involvement was my employees had to take time off the give court depositions on a lawsuit for over $2 million. They worked for them before I took over. Asked attorneys in the case if the corporate view was pierced. The answer was "NO", because the couple were personally involved in managing the business. Were they? I was allowed the opportunity to observe the business before buying it, and the husband spent most of the day strolling around the neighborhood and reading the papers while he was there. Be that as it may, the court allowed the case to proceed against them because of their personal involvement.
Outcome of the case? The couple retired to Florida from NY, put all the money into a home protected by the state's Homestead laws, so the plaintiffs settled for whatever they can from the insurance.
While I had the business in an LLC, there was a slip and fall at the business, and the customer got an attorney after me. He threatened lawsuits and all kinds of things. At first, I had the correspondence sent to me. But when the amount they're looking for went up to over $10,000, I told them to send everything to my insurance. I got liability insurance for my LLC and an endorsement that covers me personally. Nine months went by and the customer came back to me crying that his attorney stopped answering his calls. Reason why? It's too much work for a claim of measly $10,000. The insurance company had a case number, I checked, and they tell me they received correspondence from the attorney and it's being looked at. Haha. I told the customer to hire another attorney that's not so lazy. Never heard back.
Bottom line, the corporate veil will be pierced in any event. You're the alter ego of the LLC. All they have to ask is what this dummy partner in the LLC does, and it would be case over. With an insurance company, attorneys will not touch the case unless they get a big payday. Bottom line, you're wasting your time.
My experience is that insurance worked better than an LLC.
Thank you!
Was the liability insurance for your LLC and endorsement that covers you personally as one policy? Or is it two different policies?
It's one policy covering the LLC with an endorsement that covers me. That I got to thank to an insurance agent who is knowledgeable about commercial insurance. The S Corp couple I mentioned was sued personally for negligence.
Here's some info on foreigners being LLC members:
Appears you have to file a partnership return, and there are some withholding tax requirements.
Remember, the courts will look at who is responsible in it's normal business operation. A kid in school, or a sister in another country will probably not active in it's operations, so if something happens, it's you.
I am not licensed to practice law in your state, but I can give you a general idea of how piercing the corporate veil works. In general, courts are allowed to pierce the corporate veil to prevent fraud or grave injustice. While the bar is high for the court to even consider piercing the veil, the court is not going to be deterred by your entity being classified as a MMLLC rather than a SMLLC. The issue is the conduct (i.e. committing a fraud) and intent (i.e. intent to defraud) rather than the corporate form.
I don't think it makes a whole lot of sense for you to jump through hoops to add members to your LLC and dilute your equity and control based on the concerns you laid out. However, there could be additional considerations for your particular situation.
As always consult an attorney licensed in your state before making decisions that could affect your legal rights.
I agree with @Patrick M Nichols, piercing the veil is independent of the type of LLC.
The benefit of multi-member LLC vs single member is for the charging order protection that could be different in some state. It is a different concept.
I agree with @Patrick M Nichols, piercing the veil is independent of the type of LLC.
The benefit of multi-member LLC vs single member is for the charging order protection that could be different in some state. It is a different concept.
Thank you so much all of you guys!
Does mostly everybody have one member LLC? Or pretty much most people own an LLC with their spouses?
I agree with @Patrick M Nichols, piercing the veil is independent of the type of LLC.
The benefit of multi-member LLC vs single member is for the charging order protection that could be different in some state. It is a different concept.
Thank you so much all of you guys!
Does mostly everybody have one member LLC? Or pretty much most people own an LLC with their spouses?
Yes, I had my wife as a member of the LLC we had. Believe we do everything together. We filed a separate partnership return for the LLC. See the issues:
While the LLC provides some liability protection in theory, we didn't do it for that reason alone, as mentioned, lawyers sue you personally anyway.
In my experience, similar to Patrick and others, the structuring shenanigans going on behind the scenes of an LLC probably do not matter much to the judge looking at the case behind the bench. The questions the judge asks him or herself are more political and judicial and involve concepts like 'fairness' and 'equity'. So heck it could even hurt you in the courtroom to have elaborate veils over the ownership the judge can see right through--the judge might assume you are trying to defraud the public somehow and you need to be shut down! Better to just have a simple LLC, take any basic steps you can to increase anonymity, run a clean business, and have good insurance. Then you should rest easily enough at night as you can, having done your part to spread the risk around rather than leave it directly on your shoulders. Regarding couples, yes it depends on the state but also the couple. Some couples have totally separate finances and some do not. In Wisconsin there are even creditor avoidance strategies like putting everything in your spouses name before signing a personal guarantee, since one spouse can go bankrupt and live off the assets of the other. But that all varies based the specifics as always. Happy investing!
Very good article. Thank you so much!
In my experience, similar to Patrick and others, the structuring shenanigans going on behind the scenes of an LLC probably do not matter much to the judge looking at the case behind the bench. The questions the judge asks him or herself are more political and judicial and involve concepts like 'fairness' and 'equity'. So heck it could even hurt you in the courtroom to have elaborate veils over the ownership the judge can see right through--the judge might assume you are trying to defraud the public somehow and you need to be shut down! Better to just have a simple LLC, take any basic steps you can to increase anonymity, run a clean business, and have good insurance. Then you should rest easily enough at night as you can, having done your part to spread the risk around rather than leave it directly on your shoulders. Regarding couples, yes it depends on the state but also the couple. Some couples have totally separate finances and some do not. In Wisconsin there are even creditor avoidance strategies like putting everything in your spouses name before signing a personal guarantee, since one spouse can go bankrupt and live off the assets of the other. But that all varies based the specifics as always. Happy investing!
Wow! You guys know a lot about the subject!
Thank you so much all of you for teaching me!
Ryan, you mentioned to take steps to increase anonymity. What did you mean by that? To put an LLC into a trust? Or to have a registered agent with a different address?
You have two kinds of protection by using entities like LLC.
The inside protection: any liability coming from inside the LLC, will not extend outside of it and you personal property won't be at risk.
The outside protection: any liability arising from you personnaly should not extend to the asset inside the LLC.
The inside protection is generaly the same in every state. However, if you do something stupid or illegal as a member or employee of the LLC, you may also be personnaly liable. Also if you did not treat your LLC as a separate entity (mixing of personal account, lack of proper documentation or filing, etc...) you may pierce the veil of the entity and it would be disregarded by the court.
The outside protection varies between states. The best protection available is when the charging order is the only remedy (ie, any creditor can only get distribution made out of the LLC if any, but can't force the LLC to foreclose or have an active participation in its operation, but still has to pay all taxes due even if no distribution has been made).
A lot of states don't have the charging order as sole remedy and a judge may order the LLC to foreclose. In case of a multi-member LLC, showing that another member would be harmed by the forclosure may help to avoid this judgment. But the other member should be completely unrelated from you. Some state like Florida have the charging order as sole remedy for multi-member LLC, but not for single member (since FTC vs Olmstead). Other states like WY have charging order for both.
So as a general rule, multi-member LLC have better liability protection than single-member, but you may be ok in some state.
Different ways to get the added multi-member protection is either to have single member LLC owned by another single or multi-member LLC in another state where the charging order is the sole remedy, or to add a minority second member like a corporation, an irrevocable trust, another LLC, a child, a spouse or another family member.
Very good info. Thank you so much! I am always impressed with your posts, Mike.
So if I add as a minority member an irrevocable trust, can I be the owner of the trust? If I am the owner of LLC as well?
Thank you
You have two kinds of protection by using entities like LLC.
The inside protection: any liability coming from inside the LLC, will not extend outside of it and you personal property won't be at risk.
The outside protection: any liability arising from you personnaly should not extend to the asset inside the LLC.
The inside protection is generaly the same in every state. However, if you do something stupid or illegal as a member or employee of the LLC, you may also be personnaly liable. Also if you did not treat your LLC as a separate entity (mixing of personal account, lack of proper documentation or filing, etc...) you may pierce the veil of the entity and it would be disregarded by the court.
The outside protection varies between states. The best protection available is when the charging order is the only remedy (ie, any creditor can only get distribution made out of the LLC if any, but can't force the LLC to foreclose or have an active participation in its operation, but still has to pay all taxes due even if no distribution has been made).
A lot of states don't have the charging order as sole remedy and a judge may order the LLC to foreclose. In case of a multi-member LLC, showing that another member would be harmed by the forclosure may help to avoid this judgment. But the other member should be completely unrelated from you. Some state like Florida have the charging order as sole remedy for multi-member LLC, but not for single member (since FTC vs Olmstead). Other states like WY have charging order for both.
So as a general rule, multi-member LLC have better liability protection than single-member, but you may be ok in some state.
Different ways to get the added multi-member protection is either to have single member LLC owned by another single or multi-member LLC in another state where the charging order is the sole remedy, or to add a minority second member like a corporation, an irrevocable trust, another LLC, a child, a spouse or another family member.
Very good info. Thank you so much! I am always impressed with your posts, Mike.
So if I add as a minority member an irrevocable trust, can I be the owner of the trust? If I am the owner of LLC as well?
Thank you
You're adding another level of complexity.
I am not an attorney nor a trust expert. But my wife was a trustee of a trust for a minor, the beneficiary of the trust. Don't recall if its irrevocable or not. It's normally used for estate planning reasons. An elderly family friend, not of good health, had custody of his grandson because the parents, (family friend's daughter and husband) were drug addicts, and he did not want his daughter to lay her hands on the paid off family home, but for his grandson to inherit when he is of age. During this period, there's periodic paperwork for my wife to handle, as for all intents and purposes, she took over as the owner in place of the minor.
I said it's another level of complexity since you now have paperwork as trustee, and as member of the LLC. When we had the LLC, we have to file tax (partnership) returns for the LLC. Similarly, there are tax reporting requirements for trusts, depending on the type of trust, and the state you're in.
As I mentioned, I use insurance, umbrella insurance, to mitigate risks for my businesses and rentals. When I had six rentals, I carried $3 million in coverage, each incremental million being quite reasonably priced, and my insurance agent didn't see the need for more. Her theory is, for a $3 million claim, the insurance company will fight long and hard. As most litigation lawyers collect a cut, something like 33%,, they'll be happy with a $1 millions payday.
We're also litigants in a negligence case, my wife's sister was killed by a major oil company truck running a red light, acknowledged y the truckdriver. It took years to litigate as that particular oil company has a reputation for never settling, they fight you to death. Her family interviewed dozens of lawyers before one would take the case, because the oil company was that tough. The case was finally settled, years later, and we went to pick up the checks, and my wife had to sign the paperwork being the lead litigant for the family. I was out of state, found out he was a retired lawyer, worked out of his home, didn't need the money. His schtick is fight me all you want, waste all of my time you want, I'm retired, doing this to pass my time, so it doesn't matter to me. One negative for us as litigants was my wife's sister is a college student, not a wealthy stockbroker, so the amount of damages you can sue for is small, and the amount of time huge by comparison due to the reputation of the oil company. In other words, an unprofitable risk/reward ratio. Fortunately, my wife is stubborn, so is the attorney.
As I said, the insurance company will handle all the legal issues. If you were depending on the LLC, and all the shenanigans to duck and hide, some stubborn litigant like my wife, and her stubborn lawyer will chase you to the ends of the earth, just for the fun of it. That's why I know it made no sense to fight with my wife.
I would have to say this is wildly over complicated. If you add a second member-LLC to the first LLC, but you are the only member of the additional LLC, the courts will see right through it. You end up paying a ton in LLC fees for a structure that likely wouldn't hold up most likely.
If a single member LLC is acting like a proper business (keeping records, having multiple transactions, somewhat consecutive income, etc) the courts aren't going to refute it for the most part. For that reason you should aim to run a proper business, in which case a single member LLC should be fine. If you want the multi member LLC because you are unsure if you could be contested in a single member LLC, then find a trusted friend and give them a nominal amount (5% or less) of the LLC (or even approach an investor for this type of request.)
I definitely wouldn't go the route you suggested in this approach. Seems like a lot of expense and headache for something that would raise a lot of red flags and probably not accomplish what you are trying to do.
This isn't legal advice, simply my opinion as a real estate investor.
In my experience, similar to Patrick and others, the structuring shenanigans going on behind the scenes of an LLC probably do not matter much to the judge looking at the case behind the bench. The questions the judge asks him or herself are more political and judicial and involve concepts like 'fairness' and 'equity'. So heck it could even hurt you in the courtroom to have elaborate veils over the ownership the judge can see right through--the judge might assume you are trying to defraud the public somehow and you need to be shut down! Better to just have a simple LLC, take any basic steps you can to increase anonymity, run a clean business, and have good insurance. Then you should rest easily enough at night as you can, having done your part to spread the risk around rather than leave it directly on your shoulders. Regarding couples, yes it depends on the state but also the couple. Some couples have totally separate finances and some do not. In Wisconsin there are even creditor avoidance strategies like putting everything in your spouses name before signing a personal guarantee, since one spouse can go bankrupt and live off the assets of the other. But that all varies based the specifics as always. Happy investing!
Wow! You guys know a lot about the subject!
Thank you so much all of you for teaching me!
Ryan, you mentioned to take steps to increase anonymity. What did you mean by that? To put an LLC into a trust? Or to have a registered agent with a different address?
That is a whole discussion to itself. Anonymity usually refers to keeping your name as far from association with ownership as possible, while maintaining said ownership. Trusts are indeed one way to do this, since you do not have to register trusts (generally) anywhere and the terms/beneficiaries of the trust can remain anonymous in the vast majority of cases. Also multiple layers of LLCs, partnerships, out of state entities, overseas entities even, escrows or constructive trusts... It really matters what you need to protect and why because costs and administrative burden may not be worth it, though it is all a matter of facts & circumstances.
In my experience, similar to Patrick and others, the structuring shenanigans going on behind the scenes of an LLC probably do not matter much to the judge looking at the case behind the bench. The questions the judge asks him or herself are more political and judicial and involve concepts like 'fairness' and 'equity'. So heck it could even hurt you in the courtroom to have elaborate veils over the ownership the judge can see right through--the judge might assume you are trying to defraud the public somehow and you need to be shut down! Better to just have a simple LLC, take any basic steps you can to increase anonymity, run a clean business, and have good insurance. Then you should rest easily enough at night as you can, having done your part to spread the risk around rather than leave it directly on your shoulders. Regarding couples, yes it depends on the state but also the couple. Some couples have totally separate finances and some do not. In Wisconsin there are even creditor avoidance strategies like putting everything in your spouses name before signing a personal guarantee, since one spouse can go bankrupt and live off the assets of the other. But that all varies based the specifics as always. Happy investing!
Wow! You guys know a lot about the subject!
Thank you so much all of you for teaching me!
Ryan, you mentioned to take steps to increase anonymity. What did you mean by that? To put an LLC into a trust? Or to have a registered agent with a different address?
Asset protection is essentially a bottomless well of structures, but the most applicable strategies would fit within the main "five pillars" of protecting your assets. The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur. The second pillar is a good insurance policy as that cover the majority of your exposure. However, it only protects you from one type of liability: accidents.
After that you want to compartmentalize your assets, which is often accomplished through the use of LLCs or corporations. I personally find the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely - check out this article to learn more. The fourth pillar is somewhat similar - you want to separate your operations from your assets. That means you establish a Traditional LLC to carry out the operations of your investments, in order to separate the liability from your assets, including: paying property management, paying contractors, collecting rent, marketing, etc. Finally, with the use of Trusts while establishing these structures you can add a level of anonymity by removing your name from public record.
When you establish a trust you can have your attorney sign as a "nominee trustee," and after the signing is complete you become the "trustee" per the language used to establish the trusts. This way when people look up the property or LLC that the trust holds, they only see your attorney's name. When they want to dig deeper they will have to deal with attorney-client privilege, immediately increasing costs for anyone looking to sue you. This is a great deterrent for many potential suit filers.
I. If you want the multi member LLC because you are unsure if you could be contested in a single member LLC, then find a trusted friend and give them a nominal amount (5% or less) of the LLC (or even approach an investor for this type of request.)
I definitely wouldn't go the route you suggested in this approach. Seems like a lot of expense and headache for something that would raise a lot of red flags and probably not accomplish what you are trying to do.
This isn't legal advice, simply my opinion as a real estate investor.
I think you are right. I think I should just add a friend or a relative and give them 1% or something...
Should that 1% be reflected in the articles of incorporation? Or it is only in the operating agreement?
You have two kinds of protection by using entities like LLC.
The inside protection: any liability coming from inside the LLC, will not extend outside of it and you personal property won't be at risk.
The outside protection: any liability arising from you personnaly should not extend to the asset inside the LLC.
The inside protection is generaly the same in every state. However, if you do something stupid or illegal as a member or employee of the LLC, you may also be personnaly liable. Also if you did not treat your LLC as a separate entity (mixing of personal account, lack of proper documentation or filing, etc...) you may pierce the veil of the entity and it would be disregarded by the court.
The outside protection varies between states. The best protection available is when the charging order is the only remedy (ie, any creditor can only get distribution made out of the LLC if any, but can't force the LLC to foreclose or have an active participation in its operation, but still has to pay all taxes due even if no distribution has been made).
A lot of states don't have the charging order as sole remedy and a judge may order the LLC to foreclose. In case of a multi-member LLC, showing that another member would be harmed by the forclosure may help to avoid this judgment. But the other member should be completely unrelated from you. Some state like Florida have the charging order as sole remedy for multi-member LLC, but not for single member (since FTC vs Olmstead). Other states like WY have charging order for both.
So as a general rule, multi-member LLC have better liability protection than single-member, but you may be ok in some state.
Different ways to get the added multi-member protection is either to have single member LLC owned by another single or multi-member LLC in another state where the charging order is the sole remedy, or to add a minority second member like a corporation, an irrevocable trust, another LLC, a child, a spouse or another family member.
Very good info. Thank you so much! I am always impressed with your posts, Mike.
So if I add as a minority member an irrevocable trust, can I be the owner of the trust? If I am the owner of LLC as well?
Thank you
You're adding another level of complexity.
I am not an attorney nor a trust expert. But my wife was a trustee of a trust for a minor, the beneficiary of the trust. Don't recall if its irrevocable or not. It's normally used for estate planning reasons. An elderly family friend, not of good health, had custody of his grandson because the parents, (family friend's daughter and husband) were drug addicts, and he did not want his daughter to lay her hands on the paid off family home, but for his grandson to inherit when he is of age. During this period, there's periodic paperwork for my wife to handle, as for all intents and purposes, she took over as the owner in place of the minor.
I said it's another level of complexity since you now have paperwork as trustee, and as member of the LLC. When we had the LLC, we have to file tax (partnership) returns for the LLC. Similarly, there are tax reporting requirements for trusts, depending on the type of trust, and the state you're in.
As I mentioned, I use insurance, umbrella insurance, to mitigate risks for my businesses and rentals. When I had six rentals, I carried $3 million in coverage, each incremental million being quite reasonably priced, and my insurance agent didn't see the need for more. Her theory is, for a $3 million claim, the insurance company will fight long and hard. As most litigation lawyers collect a cut, something like 33%,, they'll be happy with a $1 millions payday.
We're also litigants in a negligence case, my wife's sister was killed by a major oil company truck running a red light, acknowledged y the truckdriver. It took years to litigate as that particular oil company has a reputation for never settling, they fight you to death. Her family interviewed dozens of lawyers before one would take the case, because the oil company was that tough. The case was finally settled, years later, and we went to pick up the checks, and my wife had to sign the paperwork being the lead litigant for the family. I was out of state, found out he was a retired lawyer, worked out of his home, didn't need the money. His schtick is fight me all you want, waste all of my time you want, I'm retired, doing this to pass my time, so it doesn't matter to me. One negative for us as litigants was my wife's sister is a college student, not a wealthy stockbroker, so the amount of damages you can sue for is small, and the amount of time huge by comparison due to the reputation of the oil company. In other words, an unprofitable risk/reward ratio. Fortunately, my wife is stubborn, so is the attorney.
As I said, the insurance company will handle all the legal issues. If you were depending on the LLC, and all the shenanigans to duck and hide, some stubborn litigant like my wife, and her stubborn lawyer will chase you to the ends of the earth, just for the fun of it. That's why I know it made no sense to fight with my wife.
You have good points! Yeah, retired lawyer is just a cherry on top of your story! How crazy!
Thank you for sharing!
In my experience, similar to Patrick and others, the structuring shenanigans going on behind the scenes of an LLC probably do not matter much to the judge looking at the case behind the bench. The questions the judge asks him or herself are more political and judicial and involve concepts like 'fairness' and 'equity'. So heck it could even hurt you in the courtroom to have elaborate veils over the ownership the judge can see right through--the judge might assume you are trying to defraud the public somehow and you need to be shut down! Better to just have a simple LLC, take any basic steps you can to increase anonymity, run a clean business, and have good insurance. Then you should rest easily enough at night as you can, having done your part to spread the risk around rather than leave it directly on your shoulders. Regarding couples, yes it depends on the state but also the couple. Some couples have totally separate finances and some do not. In Wisconsin there are even creditor avoidance strategies like putting everything in your spouses name before signing a personal guarantee, since one spouse can go bankrupt and live off the assets of the other. But that all varies based the specifics as always. Happy investing!
Wow! You guys know a lot about the subject!
Thank you so much all of you for teaching me!
Ryan, you mentioned to take steps to increase anonymity. What did you mean by that? To put an LLC into a trust? Or to have a registered agent with a different address?
Asset protection is essentially a bottomless well of structures, but the most applicable strategies would fit within the main "five pillars" of protecting your assets. The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur. The second pillar is a good insurance policy as that cover the majority of your exposure. However, it only protects you from one type of liability: accidents.
After that you want to compartmentalize your assets, which is often accomplished through the use of LLCs or corporations. I personally find the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely - check out this article to learn more. The fourth pillar is somewhat similar - you want to separate your operations from your assets. That means you establish a Traditional LLC to carry out the operations of your investments, in order to separate the liability from your assets, including: paying property management, paying contractors, collecting rent, marketing, etc. Finally, with the use of Trusts while establishing these structures you can add a level of anonymity by removing your name from public record.
When you establish a trust you can have your attorney sign as a "nominee trustee," and after the signing is complete you become the "trustee" per the language used to establish the trusts. This way when people look up the property or LLC that the trust holds, they only see your attorney's name. When they want to dig deeper they will have to deal with attorney-client privilege, immediately increasing costs for anyone looking to sue you. This is a great deterrent for many potential suit filers.
That is interesting. Do you put a property into LLC? Or you put a property into trust?