In my research I have noticed that a few investors will put their personal residence in their wife's name. Is the smart in terms of asset protection, does it provide an added benefit?
Also, lots of talk from people who would "never own a single member LLC". I understand that single member LLC's can be considered you "alter ego" and be treated as a sole proprietorship and as your personal assets. I know you must act like an LLC - keep minutes, seperate bank accounts, etc - But in terms of having more than one LLC member, is having your wife enough? Is two members enough? Can you and your wife be considered one congruent unit - or essentially the same person. I do not want to bring on anyone else as a member - be it an employee, birddog, etc - is having my wife as a second member enough to show that the LLC is its own individual entity?
Jimmy, the reason single-member LLCs are not good for asset protection is not for the reason you stated. If you do things properly, a single member LLC should give you limited liability because that is the entire reason such entities exist.
But limited liability means that if the LLC is sued, its assets can be used to satisfy the debt created by the judgment. Your personal assets outside the LLC will be insulated from liability in a suit against the LLC.
But there is another risk that people don't often consider. And that is the risk that you will be sued personally for something unrelated to the LLC. In such a suit, all your assets will be subject to risk. Your assets will include your membership interest in the LLC. And that's where a single-member LLC is a problem. If a judgment-creditor takes your membership interest in your single-member LLC, then he can do anything he wants with its assets, including liquidating it to satisfy the amount owed to him.
If your LLC has multiple members, on the other hand, the outcome is different. A judgment-creditor only gets to take over your economic interest in your LLC and not your membership interest. This means that they will be entitled to any distributions from the LLC to you but they will not be able to vote or manage the LLC. Your partner will be able to manage the LLC using his best business judgment without interference from your judgment creditor.
As you can imagine, if your business has the habit of reinvesting profits instead of distributing it, and if it has good reinvestment opportunities, your partner can reinvest the profits back into the business for many years. During that period, the judgment creditor, as the owner of your economic interest, will have to pay taxes on his share of the profits of the LLC even though the profits are reinvested in the business. Plaintiffs generally do not like a situation like that.
Regarding having a spouse as a partner, I think that is not a good idea for many reasons. The important thing to remember is that courts do not like sham transactions. If you have a business partner, it is important that they contribute fair value towards the equity of the business in return for their share and stay engaged in the business to the extent that one can expect given their share of the ownership. If your funds, or joint funds or community property funds are used for your partner's membership interest, it may call into question the very validity of the partnership.
I hope this clears things up a little bit on this issue.
Vikram,
Thanks for the response. I am clear now that the issue is protecting LLC assets in the event of personal liability. But in my scenario there is no partner whom would be doing a portion of the work. And to that end, I would assume that your wife is as much a partner as your buddy who you add as a partner who does little owrk either. So if, like in my situation, you do not want-need-have a "real" partner who contributes a lot fo the partnership then what options are there?
Also, do you know if putting assets such as your personal residence in your wife's name does any good?