Everyone thinks they're bulletproof with an LLC, especially if it's in Wyoming or Nevada, right? But let me tell you, nothing is truly bulletproof. If your net worth starts climbing over few million, it's wise to think about adding some offshore flavor to your strategy. Why? Because of the U.S. Constitution's Full Faith and Credit Clause. It puts a cap on how much protection purely domestic LLCs can offer.
Now, I'm not here to bash LLCs. I use them. They're a solid base to start from once your net worth is 500k-1M+. But there's a lot of stuff not being talked about. Misinformation, by lawyers to scare you to do an LLC and pay them 1-5k to do it? Or maybe it's just a lack of understanding about what happens in court, things like jurisdiction and legal nexus, and how state rights come into play.
Let's talk California cause I see you in that State. It's a hotspot because of its wealth and litigation. Here's where the confusion often starts: charging orders. They're supposed to limit an LLC member's legal responsibility to just the LLC. It depends on what and where you're holding assets.
Say you're a California resident with California real estate, but you set up a Wyoming LLC because someone said it was a good idea. Surprise, you've basically turned that Wyoming LLC into a California one because you're doing business in California. You'll end up paying California's franchise tax and, if there's a lawsuit, California law applies, not Wyoming's.
This applies anywhere. Own an asset in Ohio and put it in a Wyoming LLC? The same principle. You have to register your out-of-state LLC in any state you do business, including paying any necessary taxes. This is just basic case law.
A great example is the Indian Palms Country Club Association vs. Anchor Bank case from 2015. It lays out what you need to meet to avoid the corporate veil being pierced. If your LLC is registered and paying taxes in California, you've just given California jurisdiction over it. Plain and simple.
And if you're thinking about anonymity with your Wyoming LLC, think again. In today's world, nothing is truly anonymous. Once a lawsuit kicks off, there's this thing called legal discovery. You'll have to declare all your assets. Lie, and you're looking at perjury, which is a one-way ticket to a lot of legal trouble.
This anonymity thing? It's more about privacy than disappearing off the grid. But if someone's determined, they'll find your info. It's not hard with today's tech. A lot of firms sell the dream of becoming a ghost with an anonymous LLC, but if you get sued, you're not just going to vanish. You'll face a default judgment and end up paying the max because you didn't defend yourself.
And from a tax angle—remember the Corporate Transparency Act of January 2021? It's there to prevent hiding behind LLCs for shady reasons, including tax evasion. Now, you have to include Social Security numbers on K-1s, even for LLCs. So, the IRS is on this too.
Asset protection needs to be tax neutral. Hiding assets? Bad idea. IRS and judges will come after you for fraudulent transfers. You have to set up your asset protection early, before problems arise, and make sure it grows with you. And yes, even the IRS is cracking down on asset disclosures. So, have a strong, transparent system where you don't need to hide anything.
Most investors move to syndications as a passive LP and therefore gets away from the liability issues surrounding owning direct ownership in rentals. I did turnkeys from 2009-2015 which I went accredited investor status. Today i see most LPs under 2M net worth sign in their own personal name without a LLC.
