US INVESTMENTS
How Corporate Structure Can Increase Protection with LLCs
Part 2
GARRETT SUTTON
Best-selling author of Start Your Own Corporation, Loopholes of Real Estate, and seven other books. He practices corporate and LLC law in Reno, Nevada and is a Rich Dad Advisor. ®
I
n June of 2010, the Florida Supreme Court decided the Olmstead vs. FTC case on these grounds. In a single owner LLC there are no other members to protect. The court allowed the FTC to seize Mr. Olmstead’ s membership interests in order to collect. Other states have followed the trend. Luckily there are some things you can do to protect your assets as a single member LLC.
Interestingly, even two of the strongest LLC states have denied charging order protection to single owner LLCs in limited circumstances.
In September of 2014, the US District Court in Nevada decided the bankruptcy case of In Re Cleveland.
The court held that the charging order did not protect a single member LLC owner in bankruptcy. Instead, the bankruptcy trustee could step into the shoes of the single owner and manage the LLC. This is not surprising since bankruptcy trustees have unique and far reaching powers, which are routinely upheld by the courts.( But know that, incredibly enough, a bankruptcy trustee can’ t get control of the shares of a Nevada corporation. This is a special planning opportunity available to Nevada residents – or those who may become Nevada residents.)
In November of 2014, the Wyoming Supreme Court rendered a surprising verdict in the Greenhunter case.
The court held that the veil of a single owner LLC could be pierced. The issue
centered on a Texas company’ s use of a Wyoming LLC it solely owned. The LLC was undercapitalized( meaning not enough money was put into it) and it incurred all sorts of obligations. It wasn’ t fair for the Texas company as the single owner to hide behind the LLC. The fact that a single owner LLC was involved was a material issue. The court pierced through the LLC and held the Texas company liable for the LLC’ s debts.
Even though these are fairly narrow cases, both Nevada and Wyoming have held against single member LLCs. Again, this is the trend.
Strategies for Protecting Your Assets
One strategy is to have two members. Parents can have adult children over 18 become members. For those under 18 you can use a Uniform Gift to Minors Act designation. You may want to use an irrevocable spendthrift trust for children or others.( We can prepare such trusts for as little as $ 350. But know that this trust will require a tax return to be filed every year.)
What is the smallest percentage you have to give up for the second member? Could you give up just 1 / 100th of 1 percent? Most practitioners feel that the percentage should not be inordinately low and that 5 % is a suitable second member holding.
In a state that doesn’ t protect single owner LLCs here you have an excellent
48 FEBRUARY 2018 SA Real Estate Investor Magazine