Most investors are unaware an LLC can be set up without the investor’s personal information publicly disclosed to anyone with access to a computer. A key component of creating an asset protection shield is to maintain a veil of privacy around your assets. Its common sense that if you appear worthless, a creditor will be forced to weigh the options of bringing a claim because the possibility of recovery is highly suspect.
Unfortunately, most real estate investors and professionals who establish LLCs either do not know how to create an LLC without the investor’s information being publicly exposed or downplay the importance of anonymity in planning. (I believe the latter is a direct result of a professional not understanding how to create the former.) When an LLC is organized, the organizer must select between a manager-managed, or member-managed LLC. With either LLC form, 45 states require the LLC organizer disclose the LLCs manager(s) or member(s). This information is publicly available because on the state’s secretary of state website.
How important is anonymity?
Very! Consider a recent situation involving a real estate investor in California who I will refer to as John.
Five years ago John established a California member-managed LLC to hold his rental duplex. A year ago John defaulted on a contract he signed personally. The other party sues and obtains a judgment against John for $200,000. John thought he was judgment proof because the only asset he owned is his car and the LLC. John was taken by surprise when he attempted to refinance his duplex, to pull some cash out, and the lender informed him his creditor had filed a Lis Penedes against his duplex and he could not refinance the property without paying off his personal creditor.
John’s creditor performed an asset search in California and discovered John was the member of an LLC. A follow-up search discovered the LLC owned a duplex. Armed with this information, the creditor-placed a lien on the property held in John’s LLC. If you are wondering how John’s personal creditor can access real estate inside of an LLC don’t bother, they can. The actions of John’s creditor is not about what is right but rather, how much trouble, angst, and financial pain the creditor can create in John’s life to force him to settle the creditor’s claim. This creditor is arguing John committed a fraudulent transfer when he moved his rental into his LLC. When bringing this type of action, the creditor is within its rights to file a lien against the property held in the LLC. Now John will probably ultimately prevail because the property was transferred into the LLC 4 years before the lawsuit but, John’s major asset is tied up pending the outcome of his case.
John’s obvious mistake was not using an anonymity strategy to protect his association with his California LLC. If John had contacted me five years ago, I would recommend he set up a Wyoming LLC with a nominee manager to hide his identity. Following the creation of the Wyoming LLC, we would set up John’s California LLC with his Wyoming LLC as its member manager. Thus, when someone looked at the California LLC, it would point not to John but the Wyoming LLC. If the someone followed this trail and looked up the Wyoming LLC it will point to a nominee manager and not John who is the actual, but undisclosed, manager of the Wyoming LLC.
Here is a short video on how this strategy works.