As a real estate investor, protecting your assets should be a top priority. Setting up LLCs correctly and choosing anonymity for those LLCs can be very helpful. Since you don’t know when things might go awry, you’ve got to be prepared!
If you or your property are the source of a lawsuit or have done anything to bring liability to you, and all of your assets are held in your name, you become a “deep-pocket defendant”. Anything held in your name and easily discoverable is fair game when a plaintiff attorney is deciding what to ask from you.
Limited Liability Corporations, or LLC’s, offer “Inside Protection”. This means that if something happens at a property held inside the LLC, you as an individual and your assets are protected. The LLC will be held responsible in a court of law, and the LLC only owns what is shown within the LLC. The corporate veil will generally protect owners of the LLC from being liable for that LLC’s judgements or debts.
Despite the protections an LLC affords, it is not uncommon for a plaintiff’s attorney to try to tie an owner’s assets up in a judgment or lawsuit if they can identify them. If an attorney can discover that you are the owner of multiple LLCs it can lead them to look a little further and discover multiple properties that you own. Therefore, creating anonymity for your LLCs can become very important in trying to limit the impact of a lawsuit.
The cornerstone to an anonymity compliant asset protection structure is making sure an asset search doesn’t turn up your name in relation to any of your LLC’s or your properties. This means setting up your first LLC correctly from the get go is important, and having a buffer entity is a must. Many people will refer to this as a parent structure where you create one LLC that is the owner of multiple other LLCs. By having that parent LLC be the owner of the subsequent LLCs, it removes your name from the paperwork. In Colorado, you may have to use registered agent services to truly accomplish removing your name from those LLC.
It becomes important to register that parent LLC in states where you can be the owner without having to put your name on the LLC. Some of the most popular are Wyoming, Nevada, New Mexico and Delaware.
Another consideration when choosing the state for your parent LLC is “Outside Protection”. States like Nevada, Wyoming, and Texas prevent a creditor from holding your business responsible for your personal liabilities through Charging Order Protections (COP). Many people refer to this as reverse piercing of the corporate veil. Essentially, charging order protection prevents a creditor from seizing your business assets to satisfy a personal debt.
Taking this route is how you get multilayered protection, in such a way that linking you to any of your investments is much more difficult. The goal with creating a structure such as the one described above is to encourage the plaintiff to take the maximum insurance payout and make any other option too difficult and time consuming to be worth pursuing.