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ASSET PROTECTION FOR REAL ESTATE OWNERS

James C. Mulder
attorney at law

How To Protect Your Assets With LimitedLiability Companies:

Background

Limited Liability Companies first appeared in the United States in, of all states, Wyoming in 1977. But Wyoming didn’t invent LLCs, the conceptactually originated in Germany and in some Latin American countries that called them “limitadas”. Some US oilmen liked the limitada concept inPanama and sought out the friendly legislature of Alaska to enact a limited liability company statute. Alaska didn’t pony up, but Wyoming did andthe rest is history. Texas adopted its first Limited Liability Statute in 1991. Now all 50 states and the District of Columbia have adopted LLC statutes.

The Series LLC

Enter the Series LLC, which was first created in Delaware in 1996. As of July 2010, the following additional states have adopted the Series LLCin some form or fashion: Iowa, Oklahoma, Illinois, Tennessee, Utah, Nevada, Wisconsin, and now, Texas.

Formation

A Series Limited Liability Company, or Series LLC, is an entity created under state law by the filing of a Certificate of Formation with the Secretaryof State, which has the appropriate provisions to permit it to be a Series LLC. You also need a Company Agreement under which the SeriesLLC is to be operated. This needs to be very carefully drafted if the Series LLC is to be used to its potential and should include provisions regardinghow each should be taxed.

LLCs are easier to operate than a corporation and the Series is just as simple if the owners are all the same. There is no requirement for annualminutes like there is for corporations.

Taxation

An LLC, series or individual, with two or more owners by default is taxable as a partnership, i.e. a flow-through entity for income tax purposes.This means that owners receive their portion of income tax attributes of the LLC. The LLC will file an IRS form 1065 income tax return but doesnot pay income taxes. However it may also elect taxation as a C or S corporation. Similarly, a single owner LLC, series or individual, may betaxable as a disregarded entity (schedule C, F, or E, as appropriate, on his or her 1040) or as a C or S corporation but not as a partnership. Ifthe sole owners are a married couple in a community property state, the IRS considers it a single owner LLC.

Asset Protection - Basic

Under state law, an LLC has certain features that affect the member (owner) liability for the company and creditor rights involving the companyor even a separate liability of an individual who happens to be an owner. Owners of the company do not have personal liability for the enterprise.Instead, liability for company activities is limited to the assets of the company, i.e. an owner’s investment. Likewise, an owner would not ordinarilyhave personal liability for company obligations absent a personal guaranty.

A Series Limited Liability Company provides considerable asset protection to owners carrying on a business that has several asset classes orthat has several locations. Each asset class or location can be owned by a different series LLC and provided all the books and records and titleto the assets are accounted for separately from other series LLCs, only the assets in a single series LLC are liable for the debts and claims associatedwith that series LLC. Additionally, no assets of a series LLC are attachable by creditors of another series LLC in the same “family”.

An LLC also provides significant protection from the judgment creditors of the individual owners of the series LLC, if a judgment is enteredagainst the owner after the creation of the series LLC for something unrelated to it.

The LLC statute provides asset protection by dictating the rights of an owner’s creditor. Creditors of an owner have no right to become an owner,to demand company assets, or to compel distributions. Texas law provides that a judgment creditor’s SOLE remedy is a charging order from acourt to charge the owner’s interest in the LLC with a requirement that if a distribution is to be made to the owner, it is to be made to the creditor.That is a big if and there is no obligation to make distributions to an owner, provided the Company Agreement is drafted properly.

An owner of a corporation has no such protection in law. For companies and for individuals with assets at risk to a future creditor, the asset protectionfeatures of the LLC are clearly the most substantial reason for utilizing this form of asset protection. And with the advent of the SeriesLLC, it is even more compelling.

For more information on the basics of asset protection for your business or family, contact WealthKeepers today at 713.461.9699 or info@WealthKeepers.net