If I personally get sued and I own an LLC, is my LLC protected from personal judgements against me?
The answer is no if:
The LLC is a single member LLC.
Your personal actions that led to the judgment were related to the LLC.
You transfered assets to the LLC with intent to shield them from lawsuits and creditors.
The transfer of assets to the LLC made you insolvent.
You have not maintained the corporate formalities of the LLC.
Your LLC operating agreement is not executory.
From the other side, your personal assets are not protected from LLC liability if:
The LLC’s liability arose from your personal actions.
You transfered assets to the LLC with intent to shield them from lawsuits and creditors.
The transfer of assets to the LLC made you insolvent.
You have not maintained the corporate formalities of the LLC.
You will get some protection from an executory, multi-member LLC under a charging order, but you won’t be able to take any money out of the LLC unless you settle. Many will say the creditor is responsible for any LLC taxes because he holds a charging order. That is true if the creditor has dominion and control over the LLC membership interest. Merely holding a charging order is not sufficient. It is similar to wage garnishment, the debtor pays taxes on the income even though the actual cash is diverted to a creditor.
so, BLL, are you saying:
a single-member LLC,
formed for a legitimate business reason,
holding only rental property, property financed inside the LLC,
with a properly drafted OA and following all the formalities,
and not personally engaging in business on behalf of the LLC,
offers no benefit to the member, solely because it is a single member LLC?
I’m no atty, but I don’t agree. TX LLC Act specifically provides that a single member has all the same benefits of multi-members.
[and the IRS says that the holder of a charging order is responsible for taxes on the entity’s income, even if no distribution of income is made. this is opposite to a typical garnishment. it’s what gives charging order protection its teeth. the creditor (charging order holder) does not attain ownership, control or any other rights to the LLC simply by virtue of the charging order.]
That will protect the single member from any liability associated with the LLC and that is the way I recommend a SMLCC be used, but only if a multi-member entity or true 3rd party is the single member. I would never use an individual as the single member because a personal judgment can lead to the liquidation of the assets of the SMLLC. A 12K judgment is enough to force the single member into bankruptcy where there is already case law that the trustee can take control of the SMLLC and sell assets. I can’t speak to the TX law, but I wouldn’t risk relying on it without solid case law to support the position. I avoid the situation by using a multi-member entity to be the single member.
Here is an analysis of the revenue ruling used to take the position that a mere charging order creates a tax liability. It is quite old, but I have checked with the author and his partner Jay Adkisson. The opinion is that the article’s analysis is still valid and Jay has said he defeated a debtor’s attempt to create phantom income for his creditor client. In his cases, the IRS took the position that the tax liability stayed with the debtor unless the creditor foreclosed on the partnership/membership interest or had dominion and control over it.
http://www.riserlaw.com/publications/ap/credtax.htm
Can you explain what this means, I don’t understand.
It means the single member LLC is NOT owned by an individual or an entity with only 1 owner.
So you avoid this via an LP? What are a few examples of a multi-member entity?
LLCs, partnerships, corporations, and some types of trusts.
Is husband and wife considered multi-member?
Yes and no for an LLC.
I’m not sure if the IRS will allow a h/w to form a partnership with just the two of them.
So is anybody willing to share what kind of entity they formed and why? I want to form an entity with my wife and form LPs with other people on investment projects using our entity as one of the members of the LP…if that makes any sense. You may be asking why complicate it…I’m thinking if I form an enitity I can keep that credit history, vs if I just form an LP the credit profile will be limited to that partnership or investment project and if or when it desolves so does the credit…so if I use an Enity as one of the members of the LP I can keep the entity’s credit ongoing…I may be talking out of my arse but this is what I have been able to peace together from bits and pieces of what I have learned or failed to learn… :help
What kind of sports do you like and why?
What kind of medicine do you take and why?
Whatever anyone else has done is irrelevant to you and could actually be harmful. You need a plan that is designed to meet your unique individual goals. Since you really have no idea about the issues involved, hire a local attorney and CPA you trust to engage national planners to draft a plan for you.
I think you are going to have great difficulty finding partners for an LP. Only a sucker would invest in an LP as the limited partner.
Why is your focus on credit?
Why would investing as an LP be so bad?
My focus is on credit because it’s just as important as asset protection. Building good business credit is the only way to get big money credit and good rates…at least from what I’ve heard, please do correct me if I’m wrong
No say in the operation of the partnership
No say in the distribution of profits
No way to sell the interest
Full responsibility for taxes on the profit
You heard wrong. You don’t need entities and all this other nonsense to get credit. I don’t know anyone that built an empire using entities to build business credit. The entities came after they had a profitable business for many years.
So would it be better to have an LLC create an LLC for that investment project if I were to involve others??
I know I don’t need entities to build credit, but isn’t it better to build business credit vs using your own, even though I may still be personally liable for the loan. What is all this Tom Kish talk and all this stuff I hear about build business credit? What is the purpose and benefits?
I don’t think you understand my point. Anyone who invests with you will want a say in how those funds are used. You don’t want anyone telling you how to run your business. Your investors are more like lenders. You pay them for the use of their money and they get no say in what you do with it.
Tom Kish is selling a program. There is nothing wrong with building business credit, but your time and money is better spent building the business. You can worry about business credit when you actually have a business.
If you plan to use entities for valid purposes (i. e. not asset protection), then it makes sense to buy in the name of the entity and get financing in the name of the entity.
OK, let me explain I don’t think you understand what I am trying to accomplish:
I would like to form an entity with my wife for real estate investing (flipping and fix and hold). I have one opportunity of someone who I would like to purchase a home fixing it up and hold it for a daycare. So my goal is to establish an Entity, build business credit, and invest, some projects will the be with the entity held by me and my wife and some would be in a partnership with someone else but ONLY for that project. So from what I have heard, the best solution would be to form an LLC, and form an LP for ONLY for the joint projects. Them having a say in the LP is perfectly fine with me, I expect it, but not with the LLC, that is only for me and my wife.
There may be other projects where maybe it is just a financial backing for and investment I would like to use the LLC to form LPs for those projects as well…
The perpose for the LP is so that it is limited to just that one project. The purpose for the LLC is for long time investing and long term business credit.
Couldn’t you form a multi-member LLC taxed as a partnership and establish who would have any say through the operating agreement instead of using LP’s? I’m not an authority on this…just asking a question.