If you want to protect your assets, the easiest thing to do is to start an LLC, right?
Yes, and no. Yes, an LLC that is properly set up can be a great piece of asset protection for you. Someone looking to sue you personally won’t be able to attack or seize the assets in the LLC, except in special circumstances.
But setting up an LLC is often as far as people get. And yet, unless you follow through and complete the process, you still don’t have the protection you paid for.
Here are 3 steps to making your LLC work for you.
- Pick the right state. Generally speaking if you’re going to be sued over an asset, or something that happens on an asset (i.e., roof falls down on your tenant), you’re going to be sued in the state where the wrong, or tort, happens. If the roof falls down on your Tennessee rental property, you’ll be sued in Tennessee. So, if you set up your LLC in Wyoming or Nevada, because you’ve heard they had better asset protection laws, the first thing you’ll need to do is spend some more money. That’s because you’ll have to register your LLC into Tennessee. So you’ll have 2 sets of filing fees each year and 2 sets of resident agent fees. Plus, you’ll won’t necessarily get the protection of Wyoming or Nevada law. The lawsuit will be heard in a Tennessee court, and Tennessee law will apply. You can argue that because you’re a Nevada or Wyoming company, it should be moved, but chances are you won’t win that fight.
But even having said that, there are times when you may have no choice. If you want to use a Series LLC and the property is in a state that doesn’t have Series LLC law, then you’ll either have to register your LLC into that state, or start a separate LLC in-state for the property.
- Make sure Your LLC is Complete. It’s amazing how many people come to me to review their LLC’s documents, and show me two things: (1) the filed Articles, and (2) the IRS Tax ID confirmation letter. I ask them where their Operating Agreement is, and find out that there isn’t one.
The Operating Agreement is perhaps the most important document in your LLC’s records. It’s the one that sets out who owns the LLC, how it’s run, how arguments between members are settled, and so on. Not having that document does two things. First, it forces you to run your LLC strictly by state law. The neat thing about LLCs is that you can operate them pretty much how you want, as long as everyone agrees, and it’s written out in the Operating Agreement. But without that, you’re stuck with whatever state law says on a subject.
- Follow Through! The other thing I see all the time is people who’ve set up an LLC to hold title to real estate properties, but have never gotten around to transferring those properties into the LLC. Sometimes they’ve got a reason. For example, some states charge you transfer tax to move the property into an LLC, even if you’re the 100% owner. If that’s going to cost you a few thousand, to make the transfer I can understand a reluctance to proceed. If you live in a state that does that, your best bet is to make sure the LLC is set up when you buy the property, and that it goes there first, rather than into your name. But other people just never got around to making those transfers, period.
The problem there is that you really don’t have any asset protection if you don’t retitle your assets into the LLC. You may have had good intentions, but a court isn’t going to pay too much attention to your intent. This is especially true if you never get a bank account set for the LLC, or do any business through it. A plaintiff’s lawyer will look at your structure and his or her first argument will be that the LLC isn’t being used properly, and so should be ignored.
You’ve spent the money – take the final steps and make sure your asset protection strategy works!