Articles Posted in Limited Liability Companies

Mr. Wilhite was convicted of mail fraud and aiding and abetting in violation of federal law. He was also a delinquent taxpayer with an outstanding federal income tax liability and, at the time of certain alleged fraudulent transfers, he was being investigated for the federal crimes he ultimately pled to. During the time period Mr. Wilhite would be considered a “debtor” under Colorado’s UFTA, his wife, Mrs. Wilhite, formed several companies establishing herself as sole owner while Mr. Wilhite was the person essentially controlling and operating the companies.

This case is instructive on so many levels. Every asset protection lawyer should read both the District Court decision and the 10th Circuit’s appellate decision for elucidation of multiple concepts of particular relevance to asset protection community. For example, when a debtor and debtor’s spouse come into your office for the initial meeting, it is not unusual for the debtor to suggest that because of debtor’s outstanding liabilities the debtor’s spouse should form a new company owned 100% by the non-debtor spouse but which will be run by debtor spouse in debtor’s capacity as an employee. Indeed, this brilliant strategy is then shortly followed by the suggestion that the debtor spouse be paid a very modest salary to minimize the amount that could be garnished by the debtor’s creditors.

The Wilhite case addresses the non-debtor spouse’s ownership of a limited liability company run predominantly by the debtor. After analyzing the facts, the District Court determined that Mrs. Wilhite was acting as Mr. Wilhite’s nominee and Mr. Wilhite owned an equitable interest in the company. Interestingly, the conclusion was not as easy to reach as it might first seem because Mrs. Wilhite was not only the owner of record but also performed meaningful services for the company. Nonetheless, when weighing all of the facts including extensive testimony by the company’s employees, it was clear that Mr. Wilhite was viewed as the owner and decision-maker.

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We have become so used to it that we no longer give it any thought. There is no requirement under Michigan law (as well as most other states’ laws) to disclose the beneficial owners of limited liability companies and corporations. Lawyers, formation agents and business owners routinely sign Articles of Organization as organizers and Articles of Incorporation as incorporators but are under no obligation to disclose their relationship to the entity being formed nor the entities’ beneficial owners. In many cases, such signers never become a beneficial owner or have any active involvement in the entity. Will this regime of anonymity end if H.R. 4450, the Incorporation Transparency and Law Enforcement Assistance Act (the “Bill”), is enacted? Continue Reading

It is not surprising that in the world of asset protection planning we have written extensively about charging orders. This is the collection remedy employed by creditors against debtors owning a membership interest in a limited liability company or a partnership interest in a partnership. These laws are fairly consistent throughout the United States and provide, in the case of a member of an LLC, that a court of competent jurisdiction may charge the member’s interest with payment of the unsatisfied amount of the judgment plus interest. The charging order works in this fashion. Assume the LLC has 3 members each owning 1/3 of the company and Member A has a judgment against him for $10,000. The LLC is making a $6,000 distribution ($2,000 to each member). If there is a charging order in effect against Member A’s interest, his $2,000 distribution must be paid directly to the creditor. Future distributions due Member A will likewise be paid directly to the creditor until the judgment is paid in full. Continue Reading

For a period of time, asset protection planners were quite concerned (and rightly so) about whether single member limited liability companies would be treated the same as multi-member LLC’s if a member’s creditor sought to reach the member’s interest in the LLC. While there was general agreement that in the case of multi-member LLC’s a creditor’s sole remedy was to obtain a charging order, such was not the case with single member LLC’s. Indeed, there was much commentary and analysis in the asset protection world following the Olmstead and Albright cases, where courts decided that single members of LLC’s were not entitled to the same protections as LLC’s with more than one member.

Some states then took action to clarify their positions on single member LLC’s and provide that the charging order remedy is the sole remedy for creditors of LLC members irrespective of whether the LLC is owned by one or several members. In an amendment to the Michigan Limited Liability Company Act in 2012, the legislature made it clear that single member LLC’s will be treated no differently than multi-member LLC’s if creditors come calling. So, if that is the situation today, why can’t asset protection planners in Michigan feel comfortable that a single member LLC is as protected from creditors as one with multiple members. Continue Reading

In the world of asset protection planning there are times when it is advantageous to hold a personal residence in a limited liability company. Generally, such a situation would be applicable where there is a client who wishes to protect a valuable asset from future unknown creditors, the conveyance to the LLC is not a fraudulent transfer, the desire to obtain creditor protection trumps the loss of any property tax benefit otherwise available to a principal residence, and the client accepts certain complexities that go along with the transaction. For example, the client will need to enter into a lease with the LLC upon arms length terms in order to avoid the LLC being deemed the alter ego of the client which would likely nullify any creditor protection benefits.
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Today, with the proliferation of books, articles and seminars focused on asset protection planning, there is scarcely a lawyer about who does not know that limited liability companies have some built in asset protection planning features. Even to the uninitiated, there is a vague understanding of creditors not being able to seize a member’s interest and some awareness of the charging order remedy.
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When clients come to see me for asset protection planning, it is clear that the client has preconceived notions about offshore trusts that are integral to some type of abusive tax shelters or other nefarious activity. This is not surprising. The media recently reported about a man from Niagara Falls, NY who was sentenced to 36 months in prison for selling and promoting an abusive tax shelter scheme that involved offshore trusts and domestic trusts. It is stories like this one that confuse many clients and give them unnecessary concerns about what asset protection planning is all about. As I always tell my clients, the asset protection planning we do for our clients is not designed to shelter income or avoid the payment of income taxes; instead it utilizes legitimate structures with the simple goal of helping these clients legally position their assets in a way which makes them less vulnerable to creditors.
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I have previously discussed in several blogs the powerful asset protection benefits of the current Michigan law which provides that a charging order is the exclusive remedy for judgment creditors of LLC members, even in cases where the LLC has only one member. In 2011, the Florida Legislature amended the Florida LLC Act and enacted legislation intended to address concerns over the Olmstead case, in which a judgment creditor was allowed to execute against a Member’s interest in a single member LLC. So the simple question is this: Does the new Florida law provide the same protections as those offered in Michigan?
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As discussed in my December 24, 2010 blog, Michigan has just enacted legislation which catapults it into first place when deciding which state has the best law for limited liability companies if asset protection issues are present. In Michigan, it is now beyond doubt that the charging order is the exclusive remedy for judgment creditors of LLC members.
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With the signature of Governor Granholm on December 16, 2010, Michigan moved to the front of the line when choosing states with the most debtor friendly limited liability company provisions in the country. State of the art asset protection planning with the use of LLC’s has arrived in Michigan.
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