Is an Anonymous LLC Worth It?

Question

I've been researching creating an LLC for real estate investing. I've been watching some videos by Anderson Business Advisors in Youtube (specifically this video: https://www.youtube.com/watch?v=XdSp5GXbiE4) where they suggest creating a member-managed, anonymous LLC in a state such as Wyoming and then creating a member LLC in your operating state. The reason being, this provides the anonymity protections offered in Wyoming while still enabling your operating LLC to own and operate in the state where the property is.

My questions are:

Is the added overhead of this multiple LLC structure worth it?

Is this a legitimate structure?

Are there any drawbacks of this structure that could come up down the line?

My questions are:

Is the added overhead of this multiple LLC structure worth it?

Is this a legitimate structure?

Are there any drawbacks of this structure that could come up down the line?

Eamonn McElroy · Answer

Unless you're deploying more than $3-5 million in capital, you don't need a complex, multi-tiered holding structure.

Assuming a few hundred thousand of capital, the most complex this should be is a MMLLC, either owned directly by the members or through their revocable trusts.

Talk to a business attorney, get them to draft the operating agreement, which is very important.  Have your tax CPA look over the operating agreement before it's signed.  The attorneys don't always get the tax language or considerations right.  Open a business checking account, hire a firm to do the bookkeeping and file the partnership returns annually.  Boom, done.

Also, don't worry about anonymity.  It's hard to achieve.  People who are actually in the business don't care about that, it's always people just starting out who worry about it.  You're going to be on the tax returns, maybe on a personal guaranty for the mortgage.  If someone really wants to find out who owns the company they're going to.  Just keep everything above board and carry appropriate and adequate insurance.

Mike S. · Answer

There are two types of asset protection with an LLC: Inside liability (when something happens within the LLC and it does not propagate to your personal assets), and outside liability (when something happens to you, and it can not propagate to your LLC). The inside liability protection is almost the same in all states. However outside liability varies greatly from one state to another. So by using a holding LLC in a state with excellent outside liability protection that owns the sub LLCs in weaker state, if something happens to you, your holding LLC is protected and by extension everything inside, including the sub LLCs.

In addition to offer excellent asset protection with the charging order as sole remedy (like a very few other states), WY also has reasonable fee, and also anonymity.

The anonymity by itself won't protect you if you are sued as, once in court, you will have to disclose the owner. However, when dealing with contingency lawyers for frivolous lawsuit, if they can't see what you own and the amount of asset you have, you are a less interesting target and it may prevent some actions against you. Also it will avoid the angry evicted tenant knocking on your door.

The entity structure that you are mentioning is the one I am using. I also have land trust in the mix. In my view it is a strong asset protection system for a fair recurrent maintenance price. The next step higher would be to have the holding LLC owned by an asset protection trust with an offshore component.

This system has its drawback as it will create some issues for refinancing and will also need a good bookkeeping and operating practice to make sure that you use all these entities in the right way. Failure to do so would weaken your protection greatly. You need to understand fully its operation. If you are not organized or don't want to deal with different bank accounts, yearly administrative maintenance and tax reporting then you should either pay for someone to take care of it for you completely or you should avoid it entirely and go with a much weaker protection that would match the level of involvement that you are comfortable with.

Sean Morrison · Answer

Anonymity is very difficult to keep these days, and the value is rarely there. While a WY LLC may protect your identity in a basic online search, your name is all over everything. Your identity is known by the IRS, your bank, your registered agent, you customers and vendors if you sign contracts, and many states require an officers signature on annual reports or registrations. And if the LLC is sued, the court will simply order the owner's identify revealed.

Daniel Hyman · Answer

Nicely written by @Eamonn McElroy.

All too often, folks pay for a complicated structure, not fully realizing the burden of the administrative upkeep, and in the end, the anonymity is questionable.

Christopher Smith · Answer

Sounds like Anderson has come up with a really nifty marketing campaign.

Dan Gauthier · Answer

Why do you want the anonymity? As others have said, in order to determine whether a multi-tiered structure is worthwhile, we have to know why you want it.

You can lose anonymity by necessity or accident. In other words, you or one of your partners could be required to disclose your individual identity in connection with state or local filings. Or your upstream LLC (the anonymous one) could be required to register to do business in the state where your property is located (talk to a lawyer in that jurisdiction for help with this). Finally, you or your partners could accidentally disclose one or more members' identities on an application or submittal - this happens more than you may think.

I generally don't recommend anything more than a simple LLC structure for real estate joint ventures - there have to be reasons why the additional complexity and cost are justified. If you have specific reasons to do so then it can be worth the time, effort and expense - and as others have noted, these costs are real.

Kory Reynolds · Answer

I would say keep it simple (relatively). Do what works. Create an LLC with your partners, come up with an iron clad operating agreement to protect yourselves from one another, and go out and invest.

The more complex it is, the more expensive it is to set up, and then and maintain each year - more tax filings, more fees.

I guess this is all to say make sure you have a real concrete reason to make it complex. Complex structures can actually be useful, but for your situation with only a few investors pooling together... Keep it simple. One of the messier structures I am working with right now their tax prep fees alone will exceed $50k annually for the pleasure, nevermind the several hundred thousand they spent on attorneys fees to set things up. But with a $200m development...complex makes sense.

Peter Korty · Answer

Hi @Brandt Welch,

If you don't mind me asking, what is your reasoning for creating the LLC in the first place?

I don't honestly know anything about it, but I would think that if a court pierces your corporate veil, anonymous or not, I think they'll still get the information to track it back to you.

My understanding is that LLCs are really only valuable to protect you from a partner and a partner from you. Hopefully someone more experienced than me will provide you with more information since I haven't even closed on my first property yet.

Is an Anonymous LLC Worth It?

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