LLCs in Wyoming for Asset Protection
Rental Property Investor · Clearwater, FL · Member since 2015 · 112 posts · 29 votes
I have been offered ( by a CPA and Legal Buffet ) a reestructuring of my business with LLCs in Wyoming as they apparently offer the best asset protection as you can have a Nominee manager
The scheme sounded great but at the end of the day I would be tied to that cpa /accounting studio as I will always need an adress in Wyoming and the Nominee Manager that steps in an out every year.
Has anyone here been offered the same and what were your thoughts about it ?
The benefit of the WY LLC is it allows for the setup of your state-specific LLCs with anonymity. Yes, WY does provide strong charging order protections versus a state like Florida that does not offer any protections for single-member LLCs. I would not undervalue the benefit of privacy. Many lawsuits are just shakedowns designed to intimidate deep pockets defendants into paying to make the case go away. I know some people argue against structuring in favor of insurance, but many real estate related lawsuits are not covered by insurance, so you are left to defend yourself. Keeping your ownership of business entities off the secretary of state's database helps discourage the shakedown lawsuit. I have structured many people with this type of setup, and it served them well when the lawsuit hit. The approach I take is my business is my business, and the public does not have any interest in knowing how many entities or properties I own. Second, you mention that you must use a nominee manager that steps in and out on an annual basis. This is not required for WY or DE, only Nevada. Wyoming does not ask for either the members or the manager's information on the initial or annual filing. My firm establishes 1000 or more WY LLCs every year, so I am well versed in their setup. A few last points to consider:
Anonymity is not appropriate in all circumstances, I.e., I would not use it if you are running an active business
Anonymity is just a smokescreen; if a creditor sues, wins, obtains a judgment and drags you into a debtor examine, you will lose the smokescreen which is why you need the LLCs
Once an entity is set up with your name (manager or member), then you can not unring the bell which is why if you want the anonymity you should set up the WY LLC before you create any other LLCs
A couple of well-known attorneys told me that it's a good idea to have LLCs in the states you own rental properties, and use Wyoming LLC as the holding company of those LLCs. As always the case, consult with your attorney as asset protection/tax strategy will vary greatly depending on your situation.
Why do you need asset protection? What are your goals? What specifically are you protecting against?
Are you introducing anonymity? Trusts?, Single or double member Corporate veils? Insurance? tax efficient entities? Multi state entities? Or Offshore entities? It is all good but it is also cumbersome and more expensive each layer. I do not use states like Wy or Nv because it is over kill In my case, nor do I use Bermuda, Nevis or the Cook Islands. My risk is minimal with real estate and assets are separated adequately in my opinion. I have seen others use the out of state holding LLC scenario and it interrupts simplification as you do estate planning, tax returns, and spend down. States also change their laws, and buckle to federal pressure. What is your level of paranoia 😄?
The benefit of the WY LLC is it allows for the setup of your state-specific LLCs with anonymity. Yes, WY does provide strong charging order protections versus a state like Florida that does not offer any protections for single-member LLCs. I would not undervalue the benefit of privacy. Many lawsuits are just shakedowns designed to intimidate deep pockets defendants into paying to make the case go away. I know some people argue against structuring in favor of insurance, but many real estate related lawsuits are not covered by insurance, so you are left to defend yourself. Keeping your ownership of business entities off the secretary of state's database helps discourage the shakedown lawsuit. I have structured many people with this type of setup, and it served them well when the lawsuit hit. The approach I take is my business is my business, and the public does not have any interest in knowing how many entities or properties I own. Second, you mention that you must use a nominee manager that steps in and out on an annual basis. This is not required for WY or DE, only Nevada. Wyoming does not ask for either the members or the manager's information on the initial or annual filing. My firm establishes 1000 or more WY LLCs every year, so I am well versed in their setup. A few last points to consider:
Anonymity is not appropriate in all circumstances, I.e., I would not use it if you are running an active business
Anonymity is just a smokescreen; if a creditor sues, wins, obtains a judgment and drags you into a debtor examine, you will lose the smokescreen which is why you need the LLCs
Once an entity is set up with your name (manager or member), then you can not unring the bell which is why if you want the anonymity you should set up the WY LLC before you create any other LLCs
@Clint Coons Hello Clint, thank you for your answer.
In your experience, which are the cases in which the insurance policies will not cover ? Can you provide examples please ?
Thank you !
Marisa
@Carl Fischer
Carl, thank you for your answer.
I am just afraid of what Clint says in the comment below, the instances in which an insurance policy will not cover.
I am very careful at managing my properties but still. I own 10 rentals in a C Corp. When I learnt it was not the most clever thing to do it was late. If I take them out of the C Corp and try to divide them into LLCs the tax would be huge.
I am seeing what I can do to be not so much at risk.
Marisa,
Here are some examples that insurance will typically not cover:
These are just some of the situations I have dealt with regarding clients who were not covered.
Does Wyoming recognize "participation theory" or "participation doctrine" as a basis for liability? That's generally the number one issue I see when investors try to rely on single-member LLCs for asset protection.
Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.
@Chris K. I'm not an attorney, and I don't know what "participation theory" or "participation doctrine" means, but the way I understand one of the benefits of Wyoming LLC is, in short, many states consider not fair if only one of the members of a multi-member LLC does something wrong but every member loses all, but if a member of a single-member LLC does something wrong and loses all, that's considered to be fair, except in Wyoming, even a single-member LLC will get a similar protection as multi-member LLC. At least that's how I understand it by reading this article from Corporate Direct.
Participation theory/doctrine basically refers to the concept that if the member does the wrongdoing, that member cannot hide behind the LLC for protection. It's a different concept to hold someone liable than piercing the veil.
Here's an extreme example from Pennsylvania: a single-member LLC is in the business of selling commercial equipment on behalf of others. The LLC sells that equipment and collects the cash. The LLC, however, never pays the cash to the other party (if I recall, the entity used it to pay another operating expense of the company). In that scenario, the Third Circuit has held that not only can the plaintiff sue the LLC but can also the sole member as well. Piercing the veil is irrelevant since the sole member --- by virtue of being the sole member --- actively participated in the decision to not pay the plaintiff.
Obviously, terrible facts for the defendant. But situations like the above can certainly happen to real estate investors (e.g. dispute with the contractor, a dispute with a tenant, etc.). If you are the only member of an LLC, it obviously makes it somewhat difficult to argue that you are not responsible for the actions of the LLC. After all, who is responsible for the wrongdoing of the LLC if the sole member is not responsible?
I would never say that single-member LLCs are useless. But there is always a limit to how much it can protect you. I'm just curious where Wyoming drew the lines there.
Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.
It says in Wyoming, "the charging order in standard collection matters is the exclusive remedy for judgment creditors – even against single owner LLCs."
https://www.corporatedirect.com/start-a-business/entity-types/single-member-llc/
The first question you should address is where the properties are located. Using a WY LLC to hold out of state real estate will not protect you and could create more issues. For example, if your real estate was located in IL and you use a WY LLC to hold the title, then you could be precluded from bringing an unlawful detainer action to evict a tenant because your LLC is not registered in IL. Solution - register your WY LLC in IL, but if you do that, then you give up all of the benefits of WY - unfortunately, there are a lot of real estate investors who make this mistake. Ultimately you end up paying WY and IL annual filing fees, and you have none of the WY benefits you were seeking. Another point is the charging order protection a few commentators have raised only applies to claims against the member of an LLC. If you are looking for protection from your real estate (you should), then take each property and place it in an SMLLC owned 100% by your corporation. The LLCs will be set up as disregarded entities. Depending on the state where your real estate is located, you might consider a series LLC. This will protect each of the properties from each other and your corporation. Now to protect the shares of your corporation from someone obtaining a judgment against you individually and taking your shares, set up a WY LLC to hold the corporate shares. You will be the member and manager of this LLC, and it could be set up as a disregarded entity for tax purposes.
Now all the client needs is protection from the Divorce court judges.
They say that 40% to 50% of marriages in the US end with a divorce judgement--and that's an asset and income stream protection that's really needed.
@Clint Coons - Knowing you won't be able to give me a perfect answer due to lack of information, just in general, what is your thought on people who have rental properties in multiple states with different LLCs (one LLC per state holding a few properties for example) use WY LLC as a holding companies of those LLCs?
@Clint Coons Can you explain what makes WY unique for anonymity purposes? There are many jurisdictions that actually require far less info than WY for LLC formation, which provides for straight-forward anonymity.
(Single-member asset protection is a benefit of WY, as only a handful of states offer that.)
I'll chime in here, based on my experience and what goes on in the "asset protection" market-place - in which there are:
If you have a great history with your CPA and he's well-versed in LLC & tax, you'll probably do well to follow him on this. Otherwise.....
You would not be tied for life to whoever set up the entities. You would own and control them.
Hope all this helps. Pardon all the extra "bullet points" - struggling with the BP editing :)
@Bernard Reisz
Thank you 🙏🏻 for your súper profesional answer !!!
I understand then that in Florida I should be ok using LLC plus LandTrust, correct ?
But if the properties are already in my name is pointless because I don’t have any annonymity anymore.
I have 10 properties in a C Corp 🤦🏻♀️🤦🏻♀️🤦🏻♀️, so I don’t understand exactly the tax disadvantages of having them in a C Corp, are those disadvantages just in the case I sell ?
Now that I have them all in a C Corp, the only way to go regarding asset protection is a good insurance and umbrella policy ?
Thank you !
Marisa
@Soh Tanaka I typically structure each property in a separate LLC unless I am dealing with a portfolio lender, and the lender requires grouping. The LLC is set up in the state where the real estate is located, and a WY LLC or possible DE holds all of the LLCs. I see investors who like to structure their out of state property with WY LLCs only to discover it creates problems down the road when evicting tenants as I discussed above.
@Bernard Reisz Yes, several states offer anonymity and depending on the strategy, I will use them, but for my holding LLC, I prefer WY or DE. Both of these states have strong charging order protections and business courts. The business court angle is not understood by most until they are in litigation, and their attorney is teaching the judge the difference between an LLC and a Corporation.
@Bernard Reisz Yes, several states offer anonymity and depending on the strategy, I will use them, but for my holding LLC, I prefer WY or DE. Both of these states have strong charging order protections and business courts. The business court angle is not understood by most until they are in litigation, and their attorney is teaching the judge the difference between an LLC and a Corporation.
Hi Clint,
I notice in your tagline you list Nevada as a practice state.
Do you typically recommend a Wyoming LLC instead of a Nevada LLC?
@Marisa Alvarez Just posting this to acknowledge your questions, but not in position to post a detailed response. I'll get back to this thread as soon as an opportunity presents itself. @Clint Coons same, but sounds more like we're aligned on this topic. Appreciate your response.
@Clint Coons Thanks for the response. Not saying you are wrong, but having one LLC/series per property can be considered over kill, even from some asset protection experts, as far as I know. If you have X properties, that means X LLCs/series, X books, X checkbooks, X debit cards, etc. This is just me, but I found that to be too much, especially when the equity of each property is low. To be fair, I heard from other asset protection experts who recommend one LLC per property. I'm just willing to take a little more risk for little less hassle.
@Soh Tanaka I get it - great point. Whenever we structure someone, we give them a good/better/best scenario and let them decide on their risk tolerance. Several years ago, at one of my tax and asset protection workshops for real estate investors, a person called me out for telling the class to group properties when I use one LLC per property. I think her comment was, "why would you tell us to do something you are not doing for yourself - are our assets not as valuable as yours?". It caught me flat-footed. I now teach the class with one property per LLC but tell them they can group based on their risk tolerance level. Also, I tend to focus less on equity and more on the cash flow aspect of the real estate. For example, if you have seven properties in one LLC with a total of 300k equity but each property (after expenses taxes and debt) generates $300 per month, the total risk of loss is the $2,100 income. When the client has several LLCs, I typically look at using a management entity to handle the accounting and collections, etc. to simplify life.
@Scott Mac I do not use Nevada because the only way to obtain anonymity is through a nominee manager or office/director with a corporation, and the costs are high. When we first started, Nevada was our #1 choice, but this happened - Nevada increased their fees to generate state revenue then the banks quit working with us. We used to have banking relationships with Chase, BofA, and Wells. We would let them know we set up an entity for a client, and the client needed a bank account. The bank opens the account and sends the signature card to a local branch where the client resides. The banks stopped offering this service two years ago. Now, if you want anonymity in Nevada with a nominee, you can not open a bank account for the entity because the bank will look at the secretary of state website and notice you, as the entity owner, is not listed as the manager of the LLC. Thus, the banking hassle and costs drove us out of Nevada.
Not sure how you ended up putting 10 properties in a C-Corp. It's almost universally considered the worst way of owning real estate. This is true unless you have very, very specific circumstances. And even then, most CPAs and LLMs I know would say not to do it. The tax savings most likely are not worth the likely hassle of owning it in a C-Corp.
Based on everything you wrote, I think you should talk to an attorney and a CPA as soon as possible. Based on the facts you wrote, I wouldn't worry about whether you specifically need a Wyoming LLC versus to say a Florida LLC. You have bigger issues to untangle.
I agree with virtually everything that the article said. But it doesn't paint the total picture. Often times when you get sued and you have a single-member LLC, most litigation attorneys will name both the LLC and you personally as the defendant. The fact that it's a single-member LLC almost guarantees that you are not going to get the lawsuit thrown out during the preliminary stages.
Also as someone who used to actively pursue charging orders against debtors, it's a very unpleasant experience for the debtor. After a charging order has been entered, I typically either see the defendant: (1) declare for bankruptcy within a year or so; or (2) give up and settle with the plaintiff so that they don't waste more time. That's especially for entrepreneurial types since a charging order (and related judgments) basically make it impossible for them to rebuild their life.
Now I am probably strongly biased here since much of my litigation experienced involved representing institutional lenders. When the plaintiff has billion or even trillions in assets, the defendant will almost always lose no matter what the circumstances are. But I suppose the could be helpful if the plaintiff also lacks a serious war chest for lawsuits.
Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.
@Clint Coons thank you for being specific. Your answer helps a lot.