LLC with single member VS Individual? Thoughts?

[Modeste Tchakoua]

Dear Experts,

Thank you for reading my question. I would like to ask if there are any advantages of using a single member LLC Vs. putting ones personal name in a property. From my reading, the opinion is that you can still be sued personally even if you have a single member LLC. If this is true ( forgive my assumption), is there any advantage going through the extra paper work? How about the tax burden/incentives?

I am in the process of buying a property and not sure if I should put in an LLC.

Would appreciate your thoughts on this subject.

Thanks,

Modeste

[Mike S.]

You can always be sued personally whatever structure you have. It does not mean that the plaintiff will be able to make it stick to you.

For asset protection purpose you have to understand how an LLC works.

You have two types of liability: inside liability and outside liability.

Inside liability is coming from an action that happened inside your LLC that created a tort.

Outside liability is coming from an action that happened outside your LLC (for instance your kid had a car crash and injured someone).

All states will have the same inside liability protection for their LLC. The maximum that you can lose in an inside liability claim is the content of the LLC. It can not propagate to your other assets held outside that LLC.

On the other hand, the outside liability protection varies widely from state to state and most states have very limited protection for single member LLC. So if you have an outside liability claim and you lose, your creditor will be able to get the assets that are in your LLC.

The usual way to get outside liability protection for your local LLC that is in a weak state, is to have this local LLC owned by a Wyoming LLC that has a strong charging order protection (even for single member LLC). You in turn own directly the WY LLC.

The protection of an LLC is not absolute. For instance if you personally acted fraudulently or recklessly, you may be personally responsible. Also if you did not respect the proper use of your LLC (proper separation of funds, proper capitalization, proper documents and using the name of the LLC for all contracts), you may have pierced the company veil and the LLC would be considered your alter ego and not providing any protection anymore.

I believe that an LLC is a must for asset protection purpose. Now as explained before, it has its drawback (more expensive lending, maintenance cost, ...). So you will have to decide if the additional protection that you are gaining is worth the cost for you. Some will be perfectly happy to take the chance and rely only on liability and umbrella insurance. They are making a bet that they won't get involved in a catastrophic lawsuit that will exceed the coverage or be an exclusion of their insurance. Most of them will win that bet. But when your assets are becoming sizeable and you are becoming a target for nuisance/ambulance chaser lawsuit, having a proper structure beforehand may make you look less interesting for the contingency lawyers. I am not a gambler, and for me the additional cost is worth every penny to keep me sound asleep at night.