Single Members LLCs
You want the asset protection benefits of a limited liability company. But what if you don’t want any partners? What if you want to be the sole owner of your own LLC?
You can do that with a single member LLC.
But you have to be careful, as we will discuss.
There are plenty of good reasons to set up a sole owner LLC. Other owners can bring a loss of privacy and protection. And if you paid 100% for the whole asset, why should you bring in another member anyway?
But if you do set up a sole owner LLC there are three key factors to know and deal with.
- A Separate Identity
Many states’ LLC laws do not require annual meetings or written documents. Some see this as a benefit but it is actually a curse.
If you don’t follow the corporate formalities (which now apply to LLCs) a creditor can pierce the veil of protection and reach your personal assts. With a sole owner LLC this is especially problematic. Because you are in complete management control it may appear that you aren’t respecting the entity’s separation or that you are comingling the LLCs assets with your own personal assets. Without a clear distinction of the LLCs separate identity, a creditor could successfully hold you personally responsible for the debts of the LLC. Maintaining proper financial books and records (for more information on proper bookkeeping click here) and keeping LLC minutes can help demonstrate a definitive and separate identity for your sole owner LLC. You must work with a company which appreciates the importance of this for sole owner LLCs.
- Different State Laws
LLC laws vary from state to state. Some states offer sole owner LLCs very little protection. Other states, such as Nevada and Wyoming, offer sole owner LLCs a very high level of protection. So we have to pick our state of formation very carefully.
In most states a multi-member (two or more owner) LLC is protected initially by the charging order remedy. If one owner is sued the judgment creditor (the person who sued and won) will try and collect against the owner’s membership interest in the LLC. The courts and legislatures have held that it is not fair to the second owner (the one who wasn’t sued) to allow the judgment creditor to step into the LLC. Instead, the charging order remedy is allowed, which gives the judgment creditor a lien against the first owner’s distributions from the LLC. While the judgment creditor can’t step into management (and almost certainly butt heads with the second owner on everything) he or she can receive whatever monies the first owner would receive.
A major issue thus arises with sole owner LLCs. The purpose of the charging order is to protect the second owner, the other member who wasn’t sued. With a sole owner LLC there is no other owner to protect. Why should the charging order even apply?
Many states have decided that protecting the sole owner with a charging order is not fair to the judgment creditor. If the creditor has a claim, the states of California, Georgia, Florida, Utah, New York, Oregon, Colorado and Kansas, among others, deny the charging order protection to sole owner LLCs.
How do we deal with this trend against protection? We use the states that do protect sole owner LLCs. Wyoming and Nevada have amended their LLC laws to state that the charging order is the exclusive remedy for judgment creditors – even as against sole owner LLCs.
How do we set this up? Protection is structured as follows:
Joe owns a 4 plex in Georgia and a duplex in Utah. Each property is held in an in state LLC. The Georgia and Utah LLCs are in turn held by one Wyoming LLC. (This structure works in every state except California, which requires extra planning. Call 800-600-1760 for a California consult.)
In Attack #1, the inside attack, a tenant sues over a problem at the 4plex. They have a claim against the equity inside the LLC. Whether the Georgia LLC is a sole owner or multi owner LLC doesn’t matter. Their claim is against the Georgia LLC itself. Importantly, the tenant can’t get at the assets inside the Utah or Wyoming LLCs. They are shielded since the tenants only claim is against the Georgia LLC.
The benefit of a Wyoming (or Nevada) LLC comes in Attack #2, the outside attack. If Joe gets in a car wreck it has nothing to do with the Georgia or Utah LLCs. But the car wreck victim would like to get at those properties to collect. If Joe held the Georgia and Utah LLCs directly in his name, the judgment creditor could get at the fourplex and duplex. Neither state protects sole member LLCs.
But having Georgia and Utah as single member LLCs owned by the Wyoming LLC does block the attacker. Joe, as the sole owner of the Wyoming LLC, is protected by Wyoming’s strong laws. (For more information on those strategies consider reading Loopholes of Real Estate by Garrett Sutton.) The attacker only gets a charging order, which means they have to wait and possibly never get paid. The Wyoming and Nevada LLCs offer a real deterrent to litigation. Even for sole owner LLCs.
- A Properly Drafted Operating Agreement
Like bylaws for a corporation, the Operating Agreement is the road map for the LLC. While some states don’t require them they are an absolute must for proper governance and protection.
A sole owner LLC operating agreement is very different than a multi member operating agreement. You need to work with a company that will provide you with a properly drafted sole owner operating agreement.
For example, if a sole owner transfers their interest in the LLC and inadvertent dissolution of the entire LLC can occur. This is not good. You need a properly drafted sole owner operating agreement to make sure this and other problems don’t arise.
Protect Me LLC provides the expertise and know how to properly structure and implement your sole owner LLC.
To get started, click here.