Single Member LLC Asset Protection Myths (Charging Order Protection FACTS)

– 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. (bright outro music)

18 thoughts on “Single Member LLC Asset Protection Myths (Charging Order Protection FACTS)

  1. Great info!! Question
    Does putting your interest in a trust or living trust during planning protect it at all in states that allow foreclosure? Gray area in Texas for single member.

  2. Could you please make a video listing the states that allow or not what you are referring here (like WY)? I live in Colorado and I am trying to search the information about charging orders and LLCs but I can't find very detail or clear information. This is the one I found with better info but still unclear to me:
    Thank you for your videos!

  3. Thank you, I just set up a LLC in CA single member yesterday, for an apartment complex I'm purchasing that's in CA. So, now I have to set up a Wyoming LLC, any special language needed to denote ownership of CA LLC???

  4. Just need to figure out how to pressure the ‘creditor’ to lift the charging order and the strategy will be complete. Probably unique to each situation.

  5. If you would like a FREE 30-minute consultation, you can request one here:

  6. How does the Georgia Mahalo Invs. III, LLC v. First Citizens Bank & Trust Co case fall into this mix? How do you protect against this type of judgement? Isn't the whole point of charging order protection to protect against creditors going after your LLC's?

  7. @real estate protection, can the WY holding company by set up to be a Corp rather than LLC? What are the pros n cons?

  8. I have two problems. For commercial real estate. Can you help?

    1. Ex-wife finds out about everything and divorce rape courts do not care if everything collapses. They will charge me child support on net income because of retardation.

    2. I also need anonymity from local governments who propose jail time for evil land lords who accidently buy a property not knowing it was a crime to buy that particular property.

    What is my best set up? I got two packs of Satan worshippers trying to attack.

    Maybe if I hire people with extreme medical and mental health deficiencies to be the CEO's of my management companies might be an added bonus.

  9. isn't the protection of an LLC determined by where you live? for example if I live in TX and have a WY LLC, wouldn't they just follow TX law in determining how to treat the LLC?

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