- Hi, Clint Coons here with Anderson Business Advisors
and in this video, I'm going to discuss
the single member limited liability company
and asset protection.
You know, there's a lot of internet talk out there
about single member LLCs not providing any protection,
that you not have what is referred to
as charging order protections.
I just met with a client the other day
who sat down with me and said they talked
to an attorney out of California
and the attorney said ' Well if you're creating
an LLC in Washington, you have to make sure
that it's set up this way, otherwise,
you will not have charging order protections.'
Now, if you're not familiar with what
charging order protections are, well, it comes down to this.
If you get sued as an individual
and you have a limited liability company set up here.
Okay, so here's my LLC
and it has a piece of property in there.
Let's assume I generate a $12,000 a year
positive cash from this LLC.
I am the member of this limited liability company.
If a creditor over here...
Alright, let's draw our creditor.
His pitchfork. His horns.
He comes after me and he sues me
and he gets a judgment against me for $100,000.
Well, what can he take from me?
Well, anything that's in my personal name,
maybe my house.
They could put a lien on my house.
If they wanted my car, they could take my car there,
but assets held in LLCs, that's a little different.
Can they take my limited liability company from me?
Now, many people will tell you on the internet,
well actually, not many.
There are people out there who will tell you on the internet
that single member LLCs can be taken,
that your creditor can walk in and say
alright this LLC is now my LLC,
to the extend that you owe me $100,000.
Now, that information, what they're referring to there,
is a foreclosure action
and that they're going to foreclose on your LLC
and the reason why we created the LLC in the first place
is that we wanted to ensure that our asset in here
is protected from our liabilities
and we're protected out here from our assets liabilities.
So if something happens on the inside of the box,
it stays on the inside of the box.
The other thing I tell people,
what happens on the outside of the box,
it stays on the outside of the box.
So, when you're told that a single member LLC
does not have charging order protections,
that information is somewhat accurate.
What I mean by 'somewhat accurate' is that
it depends on the state law.
Not all state laws are crafted equally,
so you have to understand,
where you're creating your entity is important.
For example, let's take California, for instance.
If I set up this LLC this way in California
and I made the 12K and the judge tells me
'Hey, we're going to put a charging order on your LLC.'
and what he's informing me, is that if I take out
the $12,000 as a distribution to Clint,
I got to pay it to my creditor
until I've paid off this full $100,000.
That's what a charge order protected entity is.
That if somebody puts a charging order on your interest,
they can't take your LLC from you.
If you pull the cash out,
you got to give it over to your creditor.
Now, they tell you that it does not have
charging order protections.
What they're telling you then,
is that if this does not happen,
if they don't get paid out because of course,
if it's my LLC and the judge tells me
I got to pay any distributions over to my creditor,
I'm not taking distributions.
I'm keeping all the money in there.
What I'm going to do, rather than take distributions.
I'm going to take out a loan to myself, right?
You could do that, or heck, I manage it.
Why don't I just pay a management fee to myself
out of my LLC.
None of these are distributions
and that's going to frustrate your creditor
cause they're not getting paid.
So, in states such as California,
if that charging order does not pay out,
then they can foreclose on your interest.
They can come in and take this LLC from you
and give it to your creditor.
What they do is sell it to the highest bidder
and then the creditor would get paid up to $100,000.
So when they say it does not offer
charging order protections, what they really mean
is that the state law provides
that a creditor can foreclose on your interest.
Okay, now
whether or not a creditor can foreclose on your interest
depends, as I stated, on state law.
So this multi-member stuff
that you hear a lot of people talk about.
Oh, it needs to be a multi-member LLC
in order to have charging order protections.
That's not relevant in many statutes.
All it comes down to is this,
if I had, say, three members inside of here
and the state law allows foreclosure
against a member's interest,
all they do is foreclose on this member's interest,
not the other two members there.
So, having multiple members
isn't necessarily going to provide you more protection
if the state law provides foreclosure as a remedy.
So when I hear people say
'Well, I have to have multiple members in my LLC
in order to make sure I have these
charging order protections here
and a creditor can't foreclose'.
You're fooling yourself.
It depends on your state law.
That's why you need to know what your state statute reads.
Let's say South Carolina.
South Carolina for instance,
specifically provides for foreclosure in their statute.
So if somebody came after you,
they could just take your interest.
So when you're creating an LLC,
what you want to look for,
is you want to make sure any interest
you're holding personally has charging order protections
and more importantly, you'd like to see the statute read
that the charging order is the exclusive remedy available.
So often times, you've seen me do this many times,
they way we accomplish that with our structures,
is rather than set up your LLC
in a state that may be questionable or is downright weak,
like California; what we'll do
is we'll create these structures, your LLCs
to hold your assets in any state
where the property is located.
So this could be Florida, South Carolina, California
and then, we're going to create a holding LLC down here.
This is going to be in Wyoming.
This will be your Wyoming LLC.
Just like that.
And then you could be a single member in that LLC
and it's fine because Wyoming statute reads
that the charging order is the exclusive remedy
available to a creditor and it doesn't matter
if this is a single member LLC or multi-member LLC.
So they just kind of kill that whole argument right away.
Now if you're wondering what is the back story,
where this argument came from,
there was a case in Florida a number of years ago
called The Olmstead Decision
and an individual created an LLC there
and he got a judgment against him personally
from the federal government and they came after him
and the ended up getting the LLC
and what troubled so many practitioners
after the Olmstead Decision was that
the Florida Supreme Court basically obliterated the statute.
They said 'Well, the statute reads that the charge order
is the only remedy available.'
Well, in this case 'only' doesn't mean 'only'.
It's only meant to protect
when there's more than one member,
here we only have one member in an LLC
and clearly the legislature didn't mean to protect
one individual.
Now when you listened to the oral argument
it was baffling to hear the Florida Supreme Court
cause they didn't even refer to it
as a limited liability company.
They referred to it as a limited liability corporation.
So they had a fundamental misunderstanding
of the entity they were dealing with,
hence no wonder they came up with this crazy decision,
but that's not unique to Florida.
There's a lot of crazy decisions they come up with
when it comes to business entities,
that's why we plan around them.
So if they tell you your LLC needs to be
a multi-member LLC in order to have
charging order protections, that's not necessarily true.
You need to know your state statute
and if you want protection, it's real simple,
set up a Wyoming holding LLC to own all your other LLCs
and sleep better at night
because Wyoming not only gives you
charging order protections, it also specifically states
that whether or not there's one or more members
is not relevant.
It applies across the board.
Take care everyone.
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