Two company LLC structure as asset protection strategy

[Nick B.]

I stumbled upon a lawyer's website while searching for LLC information and this article piqued my interest: http://www.lonestarlandlaw.com/Anonymity.html

It describes a two LLC's structure designed for asset protection and anonymity. One LLC ("Holding") owns an asset and another one operates the business. The second LLC ("Operating") has no assets and deals with customers, vendors, etc. There is also no easily obtainable trace from either LLC to actual people behind them because they were formed by an "anonymous trust".

However, the article (and other articles on the site) stop short of explaining how this structure is established and operates and this is what I want to find out from people who use this kind of corporate structures. 

These are the questions that I would assume large apartment owners or syndicators would know the answers to:

1. How is "anonymous trust" created? (the site claims it's their "know how" but I don't believe they are the only ones who came up with this idea)

2. Does one LLC own another or both are owned by a trust or a physical person?

3. The article advises to add a DBA to each LLC and use it instead of the company name. What is the advantage of this technique? If the company name is "Blue Sky Properties LLC" and DBA is "Green Lake Apartments", what difference does it make from the asset protection perspective? If a tenant sues "Green Lake Apartments", the suit automatically goes to "Blue Sky Properties LLC", doesn't it?

4. How does money flow from the Operating LLC to the Holding LLC, to the actual beneficiaries of the companies and back? Does that de-facto point to the actual company owners thus rendering the entire anonymous structure useless?

5. Do Holding and Operating companies have to have a formal agreement or Operating LLC just uses the asset while Holding looks the other way ? :-)

6. How are assets (real properties) acquired in such a manner that the physical person's name/address does not show up in any public records, especially if a physical owner has to personally guarantee a full recourse loan? Does full recourse loan make the whole structure useless?

7. Who signs all documents for both LLCs and is such person assumed to be a (partial) owner of both companies in case of a lawsuit?

8. When is the right time to create both Holding and Operating LLC's if no assets has been purchased yet?

Thanks
Nick

[Hattie Dizmond]

@Nick B. 

Lone Star Land Law is an excellent resource, but they naturally are trying to generate business. What you are describing is commonly referred to as either the Texas 2-Step or the Nevada 2-Step. Some companies will incorporate one of their LLC's in Nevada, which has similar business friendly protection to Texas. Splitting the LLC's into different states creates an additional layer for people to work through. This isn't a "guru" thing. This is a valid, proven legal approach to asset protection.

1.  Anyone can create an Anonymous Trust.  You can find the forms online.  The benefit of this trust is that the only named entity is the Trustee.  The Trustee has a fidicuary duty to the beneficiaries of the trust, who are not named.  Part of that duty is to protect the identity of the beneficiary.  A Trustee, except in certain federal &/or criminal matters - not civil cases, cannot be forced - even under oath - to reveal the beneficiaries of the trust.

2. One LLC doesn't own the other. One LLC is the "holding company" and owns all the assets. The other LLC is the operating entity and actually conducts all the business. The holding company name never appears on any document, other than the original LLC filing and the DBA papers.

3. The DBA doesn't prevent a lawsuit from involving the LLC that is doing business in a different name. What it does is make the process of determining what assets could be attached in a lawsuit difficult. Imaging someone trying to get a lawyer to take on a frivolous suit. That lawyer is not getting paid, unless he wins a settlement. He takes on all the costs of the suit, in hopes of getting his % of the settlement. He's going to do an initial, cursory check of what assets the company has. If he can't find anything and the case has little merit, there's a good chance he's not even going to be willing to pursue a cause of action.

4. Assets and revenue are 2 entirely different things. The holding company holds the assets. The operating company conducts business and generates revenue. How the profits from that revenue is distributed will depend on what tax structure you have chosen for your LLC. For instance, my LLC is taxed as an S-Corp with pass through taxation, so there is a direct distribution of profits to the LLC members. Without access to the tax filings, which are not matters of public record, there is no way for anyone to know what was distributed. Remember, you are talking about a privately held corporation, so there is no public disclosure requirement.

5.  The holding company owns and holds the property.  The operating company manages the property.  The holding company pays the operating company a management fee that essentially covers it's expenses.  Do you have to have a contract between the 2?  No.  However, I like things neat, so I would, just in case the IRS came calling later.  :)

6. An individuals name will always appear somewhere, for a period of time, if they have to personally guarantee a loan. Once all the closing and funding has occurred, the property is transferred into an anonymous trust, with the guarantor or an LLC in which they are a member listed as a beneficiary. The only thing that is really lost in this process is that the LLC member is not protected from the liability of this property. However, asset protection is much more about protection from lawsuits than from creditors. If you've personally guaranteed a full-recourse loan, you're on the hook for that. The only way you get around that is to work to establish credit in the name of your LLC, which then protects the members from personal liability.

7. This is defined by the LLC Operating Agreement. Generally, any Member (owner) of an LLC can sign on behalf of the LLC. The Members can also name a "Manager", which can be a non-Member, who can conduct business on behalf of the LLC. It's important to note that nothing can prevent an individual from being named as a party to a lawsuit. CEO's of public companies get named all the time. Many times lawyers will name every single person they can find a name for in a lawsuit, with the hope that someone will settle, which starts to create pressure for the other defendants. The reality is that the plaintiff will have to prove that a Member of an LLC willingly & knowingly engaged in fraud or other illegal activity in order to proceed with that person as a party to the suit. Otherwise, individual members are protected from personal liability based upon the actions of the corporation. It's called the corporate veil and is only "pierced" by intentional wrongdoing.

8. You don't need the double LLC, until you have either a significant portfolio or net worth. Start with an LLC and designate it as a Series LLC. That will allow you to separate the assets from the management and provide protection for both. When you are ready to add the next level, it is easier to separate.

Disclaimer...I'm not a lawyer, and this should not be considered legal advice.  Please consult your attorney.   :)

However, I hope that helps.  I'm sure there will be - as usual - a string of naysayers and chicken littles who will now rain down upon this post.  I love to talk asset protection.  Feel free to PM me if you'd like.