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

[Account Closed]

@Nick B.

Don't buy into the guru hype that an LLC will protect your asset. It is not hard to find out who is behind the LLC or Corp, and lawyers will name all parties and then the house of cards will start to fall. Get a good insurance policy and be protected.

Joe Gore

[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.

[Account Closed]

@Hattie Dizmond

I will not rain on your parade. You are 65% true on what you are saying, and I work for a few law firms that sue LLC, corps and trust and I have never had any problem getting a Trustee under oath in a deposition to revel who the beneficiaries of the trust are, and if you file taxes under an LLC, it is not hard to get a copy of the tax returns if you can prove there is something was done illegal I have only been doing this over 15 years, and I have seen every trick in the book where investors set up LLC or corps thinking they can hide to only find out later they did all that work for nothing. I am working on one now in Irving where someone was hurt at the apartment complex, and the owner has the complex in an LLC pay everyone through another LLC, and this one is a slam dunk the owner has not paid taxes in over five years and going to deposition tomorrow, and he will settle after I revel about the IRS.

Hattie if I have time next week, I can teach you a few things about LLC'

I know a lot of people will disagree with me, but I have not a problem with that.

Joe Gore

[Hattie Dizmond]

@Account Closed 

I think I've already told you that I'm not going to engage in these discussions with you.  We disagree.  My lawyer disagrees.  You're entitled to your opinions and to post them.  However, I would respectfully ask that you stop addressing me directly.  I have nothing to say to you.

[Account Closed]

@Nick B.

If you need any help on deciding on whether an LLC is the best way to go PM me, I be glad to help you and beware of Gurus giving misleading information.

Joe Gore

[Nick B.]

@Hattie Dizmond, thank you very much for your comprehensive answer.  

@Account Closed, you always advise to get a good insurance and this is a good advice. However, insurance is only one layer of protection.

[Matt M.]

@Hattie Dizmond

I realize your not an attorney; however, you do seem very knowledgeable on the topic.  My focus is primarily LOs, fix&flips, and rentals.  Would you recommend the structure you describe above for my rentals?  And, what kind of structure would you recommend for my flips and LOs? (Most LOs will involve an assignment so both will be taxed as ordinary income.)

Your opinion is greatly appreciated.

Matt

[Hattie Dizmond]

@Matt M.  I had to go back and read what I wrote.  That was a while ago!

The short answer is the structure I described - starting with a Series LLC and then moving to a multi-layered, 2-LLC structure - is the way I will structure mine for rentals or flips or LO's. The beauty of the Series LLC is that under that one LLC umbrella, I can create as many Series as I want to use for the other business strategies.

[Matt M.]

@Hattie Dizmond

Series LLCs sound great. Unfortunately they're not used in my state yet.  Thank you!

[James Miller]

I'm a Texas lawyer, just not your lawyer. Anonymity really helps in deterring a plaintiff lawyer from taking a case on contingency. If the lawyer, during his asset searches in the public records, can't (easily) find non-exempt assets to seize after winning the case, the lawyer isn't going to be paid. If the lawyer isn't going to be paid, then he's not taking the case on contingency. If the dollar amount at issues isn't huge, the client isn't going to pay hourly. Meaning, lawsuit maybe avoided.

Trusts can help with anonymity. But, nothing is perfect. 

Hattie: If the case gets into litigation, I find it silly to think that the plaintiff won't be able to find out who the beneficiaries are. Who a trust beneficiary is may be directly relevant to the litigation and likely has no privilege preventing disclosure. If I put the trustee under oath in a deposition and ask details about the trust, he'd have to answer or risk contempt of court. 

Matt: you really should talk to a lawyer in your own jurisdiction. What works in TX may not work in CT. Each state really is like its own nation as far as laws go. And most lawyers only know their specific sate. 

Joe: insurance is important, but a properly set up holding company and operations company costs about the same as a year or three of premiums and provides much greater protection for the investor. I've worked as both he plaintiff lawyer and the estate planning and entity lawyer; proper use of planning *before* the risk occurs can make a substantial difference and can really shelter assets. A two or three company structure is usually worth its weight in gold (at least in TX). Most defendants (land owners) make the mistake to try and set up asset protection structures *after* the plaintiff is injured or the risk occurs. Then that makes things much easier for the plaintiff because his lawyer can allege fraudulent transfer act violations. As far as being able to easily sue and win against a holding company, it's really not easy if its properly set up. What you're describing is an improperly set up holding company. 

[Annabelle Lopez]

@Hattie Dizmond

Thanks for the explanation. I actually used Texas lone star land and law to create my managing LLC. However, Im stuck at how to structure the relationship between the Holding company and the managing company. What percentage is acceptable? How about for repairs? Do the managing company pikc up the tab and then bill Holding company? How about taxes and insurance??

Thanks