The Truth About Out of State LLCs
It’s no surprise when a debtor finds themselves in financial ruin, they try and find quick remedies to “hide” or “protect” assets they may still have. Clients constantly ask me about out of state LLCs and the asset protection that they claim to offer and if it would help them with their situation. I don’t blame them for asking since there is so much misleading information out there.
An LLC allows for the ownership (members) to remain private in many states. In order to organize the LLC, all you usually need is a registered agent (the person receiving service on behalf of the company) and a manager (does not necessarily need to be an owner). The members can be one or many, and their names do not need to become public information when the LLC is organized. Many states and companies that organize companies for out of state business people, will advertise that an LLC in their state gives business people asset protection and secrecy. Sure, this may be the case, but only if you are not in any financial trouble. If times are good, sure, you are not obligated to tell anyone that you own assets of a Nevada LLC, but when times are bad, you better not hide your ownership interest.
The problem with my clients trying to pursue this asset protection strategy is that they have personal guarantees on all their debts. When negotiating a settlement with their creditors, it would be fraudulent to omit their ownership in any LLC. Many clients think that since the information is not public, a creditor will never find it. Well this is true that it could be difficult to find for an unsophisticated creditor, but most good attorney’s will be able to find your membership interest very quickly. You do not want to get caught signing a false financial statement when you are looking to settle with your creditors. Besides, many creditors will ask you for recent tax returns in order to settle. You would typically have to report your LLC interest on your personal tax returns since this is a “pass through” entity. How will you hide this one? You can not!
There are many asset protection strategies one could design. However, these must be implemented either before they took on the debt, or when they were current on their debt and not facing any financial challenges. If you design an asset protection strategy while you are current but on the verge of insolvency, a claim could be made that you took the action because you were expecting to go into default, everything could be unwound. Talk to an asset protection attorney BEFORE you take on any debt to make sure your assets will be protected in the case you default. This will make the workout and settlement much more successful and you also will be able to present your financial statements with honesty.
