What is an LLC?

How does an LLC protect assets? Let’s say there is an LLC holding real estate with two owners, one named Joe and another named Mary. Joe gets in a car wreck while on his way to pick up coffee Saturday morning. It has nothing to do with the real estate that's inside his LLC. However, the car wreck victim, Moe, would love to get at Joe's property. Joe had cut-rate car insurance and the claim was really high, so Moe and his attorney want to try and get at Joe’s property. Luckily there is a something called a charging order for cases like this. With a charging order, all Moe can get is what Joe gets from his LLC. If no money is distributed from the LLC, Moe has to wait for money. Attorneys don't like to be in that situation because they would like to get their cut and move on to the next case. So, having an LLC and having quality insurance will protect you. Attorneys know how to get insurance money, but they're not as good at breaking through corporate protections.

Who is a charging order protecting?

The idea of the charging order is not necessary to protect Joe, but it's to protect Mary. The charging order prevents Moe from busting into the LLC and forcing a sale of the LLC asset, which would be unfair to Mary. The charging order is there to protect innocent partners, which in this case is Mary.

What if there is no Mary?

If there's no Mary, there's only Joe, and there's no other innocent partner to protect. Many courts across the country will apply a charging order when there's an innocent partner to protect, but they are not going to enforce the charging order when it's just Joe. Joe's the one that got in the car wreck, Joe should pay Moe for his injuries and damages. However, that’s not the case in all states.

States like Nevada, Wyoming, and Delaware have decided they are still going to protect Joe, even if he operates a single member LLC. They say Joe is still entitled to protection, and the statute in the state of Wyoming says the exclusive remedy is a charging order, even in the case of a single member LLC.

You have to be careful when you set up in certain states. California, for example, is the worst for corporate protections. California says since Moe is injured he can blow through the LLC even if there is an innocent partner. California doesn't care if there's a Mary to protect or not, they will allow Moe to get at Joe's assets and force a sale of the LLC interests. That’s why you want to structure your business to take advantage of the LLC and the charging order protection.

How can I protect my assets in multiple states?

Say you have a property in Oregon. That property is entitled to an Oregon LLC, which is owned by a Wyoming LLC. You then invest in a property in North Carolina, so you set up a North Carolina LLC owned by the Wyoming LLC.

If a tenant of your Oregon property sues over something that happened on the property, they have a claim against the Oregon LLC, not against you personally. They can’t get at your North Carolina LLC, and they can’t get at equity held on your personal property.

As you can see it’s beneficial to spread your properties across multiple LLCs. If you have 10 properties all in one LLC, it becomes a target-rich LLC. Often, we at corporate direct recommend only having one property per LLC. You may wish to have two or three properties in an LLC, but it really depends on how much equity you have in each property. The structure of your business really comes in to play during an inside attack, which is where the lawsuit is against an LLC, such as in our example of an injured tenant.

In the case of an Outside attack, where the owner of the LLC is the target of a lawsuit, the charging order comes into play. In our example where Moe is trying to get at Joe’s property, the car wreck has nothing to do with Joe’s Wyoming LLC, the holding in Oregon or the holding in North Carolina.

Moe can only go after Joe, and since Joe has a Wyoming LLC, even if he is the sole owner of the Wyoming LLC, Moe’s only option is the charging order. If the Wyoming LLC makes no distributions, Moe gets nothing. If the Oregon LLC and the North Carolina LLC make no distributions to Wyoming, Moe gets nothing.

This is not a great situation for attorneys who are on a contingency fee. They get a percentage of what collected and it's not a really good way to operate if they have to sit around get a charging order against the Wyoming LLC and then sit around and wait to get paid. Attorneys, again, being rational, economic animals are going to take the next case that has insurance instead of waiting for Joe to pay Moe.

You want to use the strategic positioning of the Wyoming LLC, which will own all your other out-of-state LLCs. States like Oregon and North Carolina may not protect the single member LLC, so you really need a Wyoming entity for protection in a case like the car wreck example. The Wyoming LLC creates a firewall against Attorneys and frivolous lawsuits.

Видео What is an LLC? канала Garrett Sutton