Real Estate Investor Magazine South Africa REIM February 2018 | Page 51

US INVESTMENTS
THE DISADVANTAGES OF A LIMITED LIABILITY COM-
PANY
• Some states, including California, charge extra fees for operating an
LLC.
• Income splitting is available, but unlike an S Corp, in a business
operating as an LLC all income may be subject to payroll or self-em-
ployment taxes.
• Some states do not allow professional groups (i.e., doctors or den-
tists) to operate through an LLC.
• Transferability restrictions – consent of membership is required for each
and every transfer of membership interests. (This can also be a plus.)
WHAT ARE THE BANK
ACCOUNT REQUIRE-
MENTS FOR LLCS?
When setting up an LLC you
will want to make sure your
business account is separate
from your personal account.
If you have a more complicated
corporate structure, it’s import-
ant to follow proper procedure
when transferring funds.
• Single Member LLCs face reduced asset protection. Many states do
not honor asset protection for LLCs with a single owner.
argument for charging order protection. There is a legitimate
second member to protect. To further that legitimacy it is useful
to have the second member participate in the affairs of the LLC.
Attending meetings and making suggestions recorded into the
meeting minutes is a good way to show such involvement.
But what if you don’t want to bring in a second member?
Protecting Your Assets as a Single Member LLC
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 single owner LLC there are three key
factors to know and deal with.
1. A Separate Identity
Many states’ LLC laws do not require annual meetings or writ-
ten documents. Some see this as a benefit, but it is actually a
curse.
If you don’t follow the corporate formalities (which now ap-
ply to LLCs) a creditor can pierce the veil of protection and
reach your personal assets. With a single owner LLC this is
especially problematic. Because you are in complete manage-
ment control it may appear that you aren’t respecting the entity’s
separate existence, or that you are commingling 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 (as they
did in Wyoming’s Greenhunter case.) Maintaining proper fi-
nancial books and records and keeping LLC minutes can help
DIFFICULTIES OF OWNING A SINGLE
MEMBER LLC?
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 owner LLC (some-
times known as a single member LLC).
Before we discuss how to properly set up and use a
single owner LLC we must acknowledge a nation-
wide trend. Courts are starting to deny sole owner
LLCs the same protection as multiple member
LLCs. The reason has to do with the charging order.
demonstrate a definitive and separate identity for your single
owner LLC.
You must work with a company which appreciates the im-
portance of this for single owner LLCs.
2. Different State Laws
LLC laws vary from state to state. Some states offer single own-
er LLCs very little protection. Other states, such as Nevada and
Wyoming, offer single owner LLCs a very high level of protec-
tion in traditional circumstances (we now must be mindful of
the bankruptcy and undercapitalization exceptions.) So we have
to pick our state of formation very carefully.
The states of California, Georgia, Florid a, Utah, New
York, Oregon, Colorado and Kansas, among others, deny the
charging order protection to single owner LLCs.
How do we deal with this trend against protection? We use
the states that do protect sole owner LLCs. Wyoming , Ne-
vada, Delaware, South Dakota and Alaska (collectively “the
strong states”) have amended their LLC laws to state that the
charging order in standard collection matters is the exclusive
remedy for judgment creditors – even as against single owner
LLCs.
How do we set this up? Protection is structured as follows:
John owns a fourplex 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.)
In Attack #1, the inside attack, a tenant sues over a problem
at the fourplex. They have a claim against the equity inside the
LLC. Whether the Georgia LLC is a single owner or multi
owner LLC doesn’t matter. The tenant’s 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 strong state LLC comes in Attack #2, the
outside attack. If John 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 prop-
erties to collect. If John held the Georgia and Utah LLCs di-
rectly in his name, the judgment creditor could get at the four-
plex and duplex. Neither state protects single owner LLCs.
But having Georgia and Utah as single owner LLCs owned
by the Wyoming LLC does block the attacker. John, as the
sole owner of the Wyoming LLC, is protected by Wyoming’s
strong laws. The attacker only gets a charging order, which
means they have to wait and possibly never get paid. A strong
state LLC offers a real deterrent to litigation. Even for single
owner LLCs.
SA Real Estate Investor Magazine FEBRUARY 2018
49