Holding LLC Certificates in Wyoming for Superior Protection with Armor8®
You want the best protection possible for your assets. You want to use the strongest entity available. But if you live in a weak asset protection state (like California) and set up your LLCs in a strong state (such as Wyoming), which state law applies? In an outside attack where a car wreck victim has won in court and is seeking to collect, the old standard lawyer answer is: It depends.
If you live in California and hold your Wyoming LLC membership interest (your certificate representing ownership) in California, that certificate is your personal property in California. Your Wyoming LLC can then be subject to the jurisdiction of a California court. In such a case California’s weaker laws will apply.
However, with some careful planning and by actually holding the physical Wyoming LLC certificates in Wyoming, the stronger asset protection of Wyoming law can apply. (Please note that we will use California and Wyoming in our discussion but any weak state/strong state scenario will apply.)
A membership interest in an LLC may be held in two ways: (1) as a certificated security; or (2) as an uncertificated security. A certificated security is a declared ownership interest (like a corporation’s stock certificate) represented by a properly prepared and held certificate. An uncertificated security is an ownership that is not represented by a properly prepared certificate. See, UCC 8-102(4), (18). Most membership interests in LLCs are held as uncertificated securities. Indeed, a membership interest in an LLC is not a security, unless its terms expressly so provide. See, UCC 8-103(c).
One downside to holding an LLC as an uncertificated security is that it usually is considered by the courts to be a “general intangible.” The courts see the LLC ownership as accompanying the owner of the uncertificated security.
A court has jurisdiction over an individual if they live in the court’s district. Personal jurisdiction means the court has the ability to assert orders against the individual.
Thus, if a court in California has personal jurisdiction over a judgment debtor (someone who lost in court and for purposes of example we will call “Bob”), then the court in California also may have in rem (property) jurisdiction over Bob’s Wyoming LLC. This is true even though his LLC was formed in Wyoming. Bob’s LLC membership interest is deemed to be “intangible personal property” that accompanies him in California.
In this way, an uncertificated security representing a Wyoming LLC membership interest can be subject to California’s weak laws. When Bob is served in a California collection case, a California court not only acquires personal jurisdiction over Bob but all of his California holdings as well, including uncertificated securities even if his LLCs were formed in Wyoming.
Neither Bob nor you wants this result. Let’s consider a better alternative.
There are distinct advantages to holding a membership interest in an LLC as a certificated security.
One definite advantage is that Bob’s interest in a certificated security may be reached by a judgment creditor only by actual seizure of the security certificate by the officer making the attachment or levy. See, UCC 8-112(a). Thus, in dealing with certificated securities, possession of the securities is the vital matter. Placing them in a Wyoming safety deposit box, a service we provide, puts the certificates out of the easy reach of a California (or other state) court.
Furthermore, the local law of the jurisdiction in which a security certificate is located at the time of delivery governs whether an adverse claim can be asserted against a person to whom the security certificate is delivered. See, UCC 8-110(c). Delivery of a certificated security occurs when the purchaser acquires possession of the security certificate. See, UCC 8-301(a)(1).
Therefore, if Bob acquires possession of a security certificate in Wyoming, then delivery of the security certificate occurs in Wyoming. As such, the law of Wyoming (the jurisdiction in which the security certificate was located at the time of delivery) governs whether an adverse claim can be asserted against Bob.
In this way, even if Bob is served with process in California, the California court may apply only those stronger remedies against Bob’s Wyoming LLC membership interest that exist in Wyoming, and not those weaker remedies that exist in California.
Thus, if a charging order against Bob’s LLC membership interest is the exclusive remedy in Wyoming, a California court must apply Wyoming’s superior law to the case.
HOW TO TAKE ADVANTAGE OF THIS LAW FOR GREATER PROTECTION
Our firm has developed a method for certificating LLC securities in Wyoming to be governed by Article 8 of the UCC so that Wyoming law applies.
We call it “Armor8®.”
We add specific jurisdictional Article 8 language to the Operating Agreement and the membership certificates. We hold the membership certificates in a safe deposit box at a Wyoming bank. Your certificates are physically located in Wyoming and governed by Wyoming law.
We have not had a case challenging this procedure and can make no guarantees as to how any one court would rule. But by taking the extra steps here you are in a much better position to argue the applicability of Wyoming law, to your greater protection.
The cost for our Armor8® service is very affordable, click here to see pricing.
If you would like to have Corporate Direct act as your Registered Agent and prepare Armor8® documents, please schedule a consultation to get a comprehensive quote.