Can Nevada or Wyoming Protect Your Real Estate Investments in Another State

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I received an email from a client recently who was concerned about some information she received from an promoter of Wyoming and Nevada LLCs. She was told that a Wyoming LLC registered to conduct business in California will provide greater protection from charging orders than a California LLC. I hear this same argument time to time from Nevada or Wyoming ptichmen who’s only concern is selling you an entity and not in protecting your affairs. The information they provide is full of half-truths and misleading statements with one purpose in mind — to get you to buy an entity. I thought that I should share my response:

Dear Jane Doe,

In my opinion a WY LLC or a NV LLC registered to do business in California would not prevent the creditor of a member from enforcing a charging order against the LLC.   — Why? — When it comes to asset protection and LLCs we are concerned with two forms of liability — inside liability and outside liability.  With inside liability the primary concern is protecting ourselves as members from liabilities associated with the activities taking place in the LLC e.g., rental real estate.  The protection for inside liability claims is derived from two places: state law and the LLC operating agreement that governs how the LLC is run and the protection it offers to its members.  Most states are fairly uniform in their approach to inside protection.  Liabilities that occur inside a LLC remain inside and will not attach to the owners of the LLC.  Of course, this is contingent upon having a solid LLC operating agreement that has adequate protection and indemnification provisions for the member and managers.  Unfortunately, when I review a client’s operating agreement it is not uncommon to find two or three critical defects that, if exposed in a lawsuit, could spell disaster.   Nevertheless, with the protection provided by state law and a good operating agreement, the LLC offers excellent protection from the liabilities associated with owning real estate. Thus, if you created a California LLC or a Wyoming LLC registered in California to hold your rental real estate, both entities will protect you from claims arising out of liabilities associated with the LLC’s assets.  If, on the other hand, you simply set up a Wyoming LLC to hold the property without registering it California, it would provide with you no protection whatsoever.

Outside liability protection is just the opposite. Rather than looking to the assets of the LLC for recovery, a creditor is seeking a judgment against a LLC member because it is the member that caused the harm and not the LLC. Most people I meet completely miss this point because so much attention is given to protecting you from your real estate that very little thought is given to your personal actions or, for that matter, those of your children who could also jeopardize your investments. You, by your everyday actions, are probably the greatest threat to your assets.

Nilse, an avid real estate investor, is traveling in his new BMW 7-series sedan on Interstate 5. Confused by the electronics, his focus is on the stereo and not the road! Because his attention is diverted, Nilse does not see the car in front of him suddenly brake. Nilse plows into the car, causing substantial damage to both vehicles and injuries to the occupants of the other vehicle. If Nilse owns his real estate investments in his personal name, he is at serious risk. Fortunately for Nilse, his attorney recommended he place his investments in LLCs. How does the LLC help Nilse? It has to do with state law and what the creditor of a LLC member can reach when he collects on his judgment.

Every state has, to some extent, given LLC members what the law refers to as “charging order” protections. Unlike the situation with “Inside Liability” where the creditor can only look to the assets of the LLC and not the members individually for recovery, with outside liability the creditor is looking to recover against the member’s assets.  Your LLC membership interest, like the stock you own in a publicly traded company, is an asset that is considered personal property.  One important feature of this asset is its unique characteristics that prevent creditors from levying on it if they have obtained a judgment against you personally.   Approximately 23 states, Nevada and Wyoming included in this number, limit the judgment creditor to a charging order.  
 
The benefit of the charging order is it limits your judgment creditor to a lien on any distributions you decide to make from your LLC.  If you do not make distributions, then your creditor does not collect on the judgment.  It sounds great and it is, but unfortunately all states do not adhere to the charging order as the sole remedy.  Some states, like California, go so far as to allow a judgment creditor to foreclose on the member’s interest if the LLC is not making distributions.  For many investors this is disconcerting given that the state requires the investor to have a LLC registered in the state if it is to hold real estate (the statute actually refers to conducting business and renting property falls within this definition).  To trump a state like California and its creditor-friendly approach to asset protection, many investors will establish a LLC in a state like Nevada or Wyoming then register their LLC to conduct business in California as a foreign LLC.  These investors believe that California must apply the law of the entity’s home jurisdiction when it comes to matters of charging order protections.  For example, if I created a Nevada LLC (remember Nevada does not allow any remedy other than a charging order) then register it in California as a foreign LLC, I will be immune from California’s approach to the charging order should someone attempt to collect on my LLC interest. Unfortunately, California and every other state that I have researched does not take this approach.  
 
Under California Corporation Code 17450 the laws of the state … under which a foreign limited liability company is organized shall govern its organization and internal affairs and the liability and authority of its managers and members. In other words, the laws of the state of organization will govern any claims arising between the members or managers with respect to the inner workings of the company or between the company and its members or managers.  The enforcement of a charging order on a member’s LLC interest does not fall within the statute’s definition.  A charging order is the application of a judgment against personal property held by a California resident.  Thus, if I am creditor and I obtain a charging order against a California’s resident’s interest in their Nevada LLC registered to conduct business in California, I can, under California Corporation Code 17402, foreclose on the member’s interest.  This is not considered part of the affairs or internal workings of the company.
 
In layman’s terms this means I can foreclose on your out-of-state LLC because it has availed itself of California’s (see my previous post on Florida LLC Protections) laws when it registered to conduct business in California.  To obtain the protections offered by Wyoming or the other strong asset protection states you can create a LLC in one of these states and have it own your California LLCs.  In this way the out of state LLC does not fall within the jurisdiction of California, nor is it subject to its enforcement actions.  

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12 Comments

  1. Clint,

    Very informative post! It seems to me that holding larger properties– say, a 35 unit apartment complex–in an LLC is the way to go. For smaller investors– say those owning 1-4 duplexes–do you feel it would be better to purchase a healthy umbrella insurance policy than form an LLC? I’d love to hear your opinion.

    • Kyle,

      An umbrella policy may or may not protect you. I have posted a few articles on my web regarding insurance companies that have weaseled out of paying on a claim. See http://www.alglaw.com/news/view/85. Insurance is important and I encourage each of my clients to carry an umbrella policy but I do not base my asset protection around it. Insurance companies are in the business of making money and if they can get out of paying on the claim they will definitely try. Further, umbrella insurance will typically not protect you from workers who are injured on your property, personal judgements, or business related accidents. For owners of duplexes I would recommend placing the units into LLCs based on the over equity value, rent rolls, and tenants. It is not a one size fits all approach but in creating the LLC you are compartmentalizing your liability exposure.

  2. Pingback: Running your Real Estate Business out of Nevada or Wyoming « Clint Coons Blog

  3. The half truths you mentioned early on the blog post are intriguing. I’m sure many others haven’t detected these half-truths. That is both unfortunate and depressing at the same time. I also like the analogy between driving a car with the driver’s focus aimed at the wrong thing.

  4. Thank you very much for an enlightening article.

    I have one question: Let’s say instead of LLCs, I would like to form S-Corporations. Will this give me the same protection, or must any of the two entities (in Nevada or California) be LLC’s to give the same protection?

    • Anton,

      You wouldn’t want to use an “S” corporation unless you are flipping properties. Further, the corporation does not give you charging order protections unless it is a Nevada corporation. Call me if you would like to discuss in more detail.

  5. Very informative article. Sir, you provide a great service. Thank you.
    Q 1: You said:”To obtain the protections offered by Wyoming or the other strong asset protection states you can create a LLC in one of these states and have it own your California LLCs. In this way the out of state LLC does not fall within the jurisdiction of California, nor is it subject to its enforcement actions. ” Now if I were to file an application to register my foreign LLC (ie Wyoming LLC) in California, would I get the same protection as if I were to say that my WY llc owns my CA llc?
    Q2: Also how would I make that official? would I file a fictitious business name in which I would say my WY llc is the owner of the CA llc?

    • Thank you very much for your past answers…

      I have a real estate property in California for which I created an LLC in California. Currently the title shows the LLC as the owner. The Ca LLC has a sole member owner which is the WY LLC but it doesn’t say specifically (in the county recordings) whether it is the CA or the WY LLC that owns the property since both have the same name The WY LLC is managed by a WY (C) corporation that doesn’t own any assets and whose officer are my wife and mother in law. That’s how I want it to be and I am not certain if it would be seen as is by a judge and if my organization is working out or not as I want. How do I make sure everything is in order so that what I describe above is provable, in force and will be understood and acknowledged in case of a lawsuit?

  6. Please explain your rationale for this statement:

    “To obtain the protections offered by Wyoming or the other strong asset protection states you can create a LLC in one of these states and have it own your California LLCs. In this way the out of state LLC does not fall within the jurisdiction of California, nor is it subject to its enforcement actions.”

    If I were able to pierce the corporate veil on one LLC, why would an extra layer prevent me from doing so? If the property sits in CA, how would it not fall within the jurisdiction of CA?

  7. Hi Clint,
    I live in Georgia but my wife and I own property in California we wanted to form LLC’s for each property but California has very expensive fees for doing so. I read the above article on forming a LLC in Wyoming for real estate protection and wanted to find out what is the best solution for doing so…Please advise

    Best Regards
    Vince White

  8. Athena Lin

    An out of state LLC owning the CA LLC? According to CA FTB (Franchise Tax Board)

    https://www.ftb.ca.gov/forms/misc/689.pdf

    if any LLC owns CA LLC or have any interests in a CA LLC then that foreign LLC is considered “doing business in CA”. This would then enable CA FTB to tax this out of state LLC and ask it to file CA tax returns. I am not sure whether that only requires the out of state LLC to register in CA to do business in CA. If registration in CA is required then it defeat the purpose of outside asset protection since the creditor now just go foreclose on that parent out of state company as it is also registered in CA.

  9. Rafael Lopez

    I know I’m a bit late to the party, but to reiterate; you’re saying the best approach is to have an LLC created in California (not registered) to be owned by a Wyoming LLC (created in Wyoming)? Assuming your property is in Cali?

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