Blog | Personal Finance

What is a Limited Liability Company?

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As you build your net work, you should invest in businesses and real estate. As you grow your assets, you need to protect them with a Limited Liability Company (LLC) in the state that offers you the best asset protection.

Some people think investing in this entity is too expensive. However, if you start business as a sole proprietor, you are personally responsible for every claim. For example, a plumber goes out to a job and something bad happens at someone's house, the home owner can sue you for not only the plumbing business assets, but all of your personal assets, including the money in your bank account and the equity in your house.

Right from the start, we want to set up a good entity whether it is single-member or a multi-member. There is a trend across the country to deny protection to a single-member LLC. Let us look at how we protect that type of entity.

Let us say Mary and Joe get into a collision with their car. Car wreck victim Mo would love to get at Joe's property. Joe had cut-rate car insurance. The claim was high so Moe and his attorney want to get at what Joe has beyond his insurance.

Moe and his attorney get a County Court judgment, saying he can collect from Joe. Then he gets a charging order to go after Joe’s assets, including any proceeds if Joe sells any real estate.

In some states, all Moe can get is what Joe gets from the LLC. If no money is distributed from the LLC, Mo must wait. Attorneys do not like to be in that situation. They know how to get at the insurance money but they are not as good at breaking through an LLC.

The charging order says: “We are not going to let Mo bust in here to force the sale of the LLC asset. That is not fair to Mary.” The charging order is there to protect the innocent partner, which in this case is Mary.

What happens if there is no Mary? There is no other innocent partner to protect. The courts in Florida, Kansas and across the country now are saying: “Look, we will apply the charging order when it is just Joe. Joe is the one that got in the collision. Joe should pay Mo.” Where there is no Mary, there is no reason to protect Joe.

However, states like Nevada, Wyoming and Delaware will still protect Joe, even if he has a single member LLC.

We must be careful when we set up in certain states. California is the worst. California says: “Mo is injured. Blow through the LLC, even if there is a Mary.” They will allow Mo to get at Joe's assets and force a sale of the LLC interest.

We want to structure things that take advantage of the LLC and the charging order protection.

Say you have a property in Oregon. We will put its title in the Oregon LLC owned by a Wyoming LLC. Then you invest in a property in North Carolina. We have a North Carolina LLC, also held by the Wyoming LLC.

If a tenant is suing over the property, that is an inside attack. They can get what is inside the Oregon LLC. They have a claim against the LLC itself, not Joe, who owns the Wyoming LLC.

They cannot get the North Carolina property. They cannot get into Wyoming, which owns all the other ones. We have asset protection. So why wouldn't we want to put 10 properties in this one LLC? It becomes target rich.

Certainly, I have clients who only do one property per LLC. Others will do two or three. It depends on how much equity you have in each property, but we do not want them to be able to get a large amount of money from 10 or more properties.

The charging order comes into play in the outside attack where Mo is trying to get a Joe.

The car wreck between them has nothing to do with real estate. With the Wyoming LLC owning the Oregon and North Carolina LLCs, Mo must go after Joe, since he owns the Wyoming LLC.

If Wyoming makes no distributions, Mo gets nothing. If Oregon and North Carolina make no distributions to Wyoming, Mo gets nothing.

Attorneys who are economic animals are going to take the next case that has insurance instead of waiting for Joe to pay Mo.

You want to use the strategic positioning of the Wyoming LLC, that will own all your other out-of-state LLCs.

We need to be aware that states like Oregon and North Carolina may not protect the single-member LLC. So, you really need this Wyoming entity here for that protection since it creates a firewall against Mo forcing a sale of the other assets.

A lot of this is covered in my book “Loopholes of Real Estate”. I would also encourage you to go to Corporate Direct. You can call 1-800-600-1760 for a free 15-minute consultation with an incorporating specialist.

We want to make sure you are up to date on what you should be doing to protect yourself. I guarantee you will get some great information.

Original publish date: July 06, 2020

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