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The Cascading Charging Order Explained

The Cascading Charging Order Explained

Real estate investors and business owners always run the risk of being sued. If they’re not protected, a courtroom loss can lead to a loss of personal assets. Even if they use a strong LLC, the victor in a car wreck case, for example, may try to get a charging order. And if their holding LLC owns an operating LLC, that same winner may try and get a cascading charging order against one or more operating LLCs. If they succeed with this remedy, it could really harm business owners. But first, what are charging orders and cascading charging orders, and what do they do?

 

What is a Charging Order?

A charging order is simply a lien on distributions from a business. So, if any distributions are made to the LLC owner, the person with the charging order will get them instead. The court ‘charges’ the LLC owner to make distributions to the car wreck victim. But when would this apply? Here is a chart to help explain this concept:

Capture1

In this chart, Joe owns a Wyoming LLC. That Wyoming LLC owns two operating LLCs. Wyoming is a stronger asset protection state, where the charging order is the exclusive remedy.

Now let’s say that Joe got into a car accident. If the car wreck victim were to sue Joe and win, they could get a charging order on Joe’s Wyoming LLC. The chart below explains this concept:

Capture3

However, the charging order limits what that car wreck victim can do. They don’t have the right to manage Joe’s business. And they don’t have the right to demand or vote that Joe’s business pay them. The only way they get paid is if Joe makes a distribution from the entity. And if Joe doesn’t make any distributions, the car wreck victim doesn’t get paid. As you can see, the charging order is a very powerful tool for protection.

 

 What is a Cascading Charging Order?

Now that we discussed what a charging order is, what exactly is a cascading charging order? And how does it differ from a regular charging order?

With a regular charging order, the car wreck victim can place it on any businesses that Joe directly owns. However, a cascading charging order is different. This applies where the car wreck victim tries to place a charging order on the operating companies that Joe indirectly owns.

While Joe doesn’t directly own the operating LLCs, the car wreck victim may still try to place a cascading charging order on it. This is because Joe indirectly owns the operating LLC through Joe’s direct ownership of the Wyoming LLC. The diagram below illustrates this concept:

Capture2

But can the car wreck victim do this? One recent Texas case addressed this issue.

 

Bran v. Spectrum MH, LLC

One recent Texas case, Bran v. Spectrum MH LLC, dealt with this issue.[1] In Bran, the parties settled the dispute through arbitration. The arbitrator ruled in favor of Spectrum, and awarded a judgment worth $1.5 Million against Bran.

To collect this judgment, Spectrum appointed a receiver. What the receiver did next was deemed to be out of line. Instead of placing a charging order against the businesses that Bran directly owned, the receiver reached the accounts of businesses that Bran indirectly owned. Bran then filed an emergency appeal.

On appeal, the issue before the Texas Court of Appeals was whether the receiver could get a cascading charging order to reach the assets of the businesses that Bran indirectly owned.

The Court of Appeals ruled that the receiver could not. Instead, the receiver could only reach the assets that Bran directly owned. The court also noted that before the receiver could attach a charging order against a specific entity, Spectrum must prove that Bran had an ownership interest in those entities. This means that if Bran indirectly owned an interest in an entity, the receiver could not reach that entity’s assets.

In Bran, the cascading charging order was off limits. The court also mentioned that the charging order was the exclusive (or only) remedy that the receiver had. This means that the receiver could only collect the $1.5 Million judgment from assets that Bran directly owned.

 

What This Means For You

Many real estate investors and business owners have an entity structure where they directly own one holding entity, and that entity owns one or more operating entities. When the business owner is sued personally, some courts (like Texas) have held that a person can’t reach that second entity via the cascading charging order.

This structure that involves a Wyoming holding company is very advantageous for business owners, because it limits what a creditor can collect when they are personally sued. And because courts are beginning to block these cascading charging orders, having this structure is a great asset protection strategy.

 

[1] Bran v. Spectrum MH LLC, 2023 WL 5487421 (Tex.App., 14th Distr,, August 24,. 2023).

The Difference Between Certificated And Uncertificated Securities

The Difference Between Certificated and Uncertificated

By: Ted Sutton, Esq.

A security refers to an ownership interest in a business or a financial instrument. These ownership interests can be in a private LLC, or corporation, or in a publicly traded stock or bond. There are two choices for holding ownership interests in a security. You can either own it either as a certificated security, or as an uncertificated security. In this article, we will walk you through the differences between the two, and when it’s best to use each one. 

Uncertificated Security

An uncertificated security is a security whose ownership is not represented by a physical stock certificate. These security interests are registered on the books of the issuer, and are tracked electronically. Given technology’s role today, this is how most securities are held. Other names for uncertificated securities include book-entry securities and electronic securities.

Pros of Uncertificated Securities

Securities can be bought and sold electronically. There are many different trading platforms today that you can buy and sell from, and given the ease of trading uncertificated securities, it is the faster, more efficient option.

The advantage is that there is no need for filling out and transferring paperwork, which reduces the overall cost of buying and selling stocks. And because uncertificated securities aren’t in paper form, there is little risk that they can be lost or stolen.

Cons of Uncertificated Securities

While uncertificated securities are preferred in many situations, there are some downsides to using them. One of them is that its owners don’t have physical proof of ownership. This can be an issue when owners are perhaps concerned about hacking or a widespread loss of data. A physical certificate avoids such risks.

And most importantly, using uncertificated securities does not provide nearly as good asset protection. Courts treat uncertificated securities as “general intangibles.” General intangibles are non-physical assets, like electronic stock ownership, and courts in your state of residence can easily exercise jurisdiction over them. So, when an individual is sued in their home state, their home state court can exercise jurisdiction over their uncertificated security.

Here’s an example. Let’s say that you live in California and own an interest (that’s an uncertificated security) in a Wyoming LLC. You then get sued in California. Because your interest in the Wyoming LLC is a general intangible that follows you to California, California will apply their law to the dispute. In this case, Wyoming’s stronger charging order protection wouldn’t apply to protect your interest in the Wyoming LLC.

Certificated Security

A certificated security is a security that is represented by a physical certificate. When you buy a certificated security, you receive a physical paper evidencing your ownership. This stock certificate contains important information about the security, including the owner’s name, the number of shares owned, the date that the owner received the security certificate and any restrictions on transfer. When you sell the stock, you transfer the physical certificate to the buyer.

Pros of Certificated Securities

The advantages to having certificated securities is greater asset protection, as discussed below.

Cons of Certificated Securities

There are more obvious cons to owning a certificated security. Selling a certificated security is more difficult and time consuming. Given how easy it is to buy and sell uncertificated securities online, trading certificated securities for public companies is not the best option for investors. Another downside is the cost associated with physically transferring the security certificate from a seller to a buyer. And because they’re in paper form, these certificated securities can easily be lost or stolen. But for your own personal investments let’s consider Armor-8.

Armor-8

At Corporate Direct we offer certificated securities for your own personally held Wyoming LLCs with our Armor-8 protection.

There are many states that offer weak asset protection (like California). However, if you are a resident of one of those states, there is a little wrinkle in the law that can protect you. Under the UCC Article 8, if the certificated security is delivered and kept in one state, then that state’s law will apply to how a creditor can reach its assets. Said another way, this means that if the security certificate is delivered and kept in Wyoming, then the out of state court must apply Wyoming’s charging order, a much stronger asset protection remedy.

We have a safe deposit box at a Wyoming bank to ensure that the security certificate is delivered and kept in Wyoming. This places the security certificate out of reach from your home state creditors. And the only way for them to reach it is to have a lawyer in Wyoming get a court order to release the paper certificate. This is a cumbersome process for an attorney on a contingency fee. The hassle factor gives you better asset protection.

Conclusion

Holding a certificated security can come in handy when you don’t want to sell your interest and want to protect your assets. However, uncertificated securities are helpful where they are regularly bought and sold on an exchange. Knowing this difference may be able to help you before you set up your business.

We here at Corporate Direct can help you protect your assets with our Armor-8 protection. This will provide you with a certificated security interest held in Wyoming for your protection from creditors.

For more information on our Armor-8 protection, schedule a consultation with us.

Corporate Direct has a weekly YouTube segment called Direct Answers from Corporate Direct

In this segment, we educate people on corporate law, business formation, real estate, wealth building, and asset protection. And if you have any general questions about something, please feel free to leave a comment on one of our videos!

For more of these updates, click the link below and subscribe to our YouTube channel.

Five Reasons Why We Don’t Recommend DAO LLCs

We Don't Recommend DAO LLCs

By: Ted Sutton, Esq.

Over the last few years, the use of blockchain technology has exploded onto the scene. DAOs have grown in popularity alongside it.

So, what exactly is a DAO? A DAO is a new entity form that stands for Decentralized Autonomous Organization. What’s unique about them is how they can be managed. Like other entities, individual members can manage DAOs. What makes them different is that they can also be managed by a smart contract on the blockchain ledger. This new and unique form of management has encouraged people to form them as partnerships, which offer no protection. Because of this, a better vehicle was needed.

In response to this demand, some states have already enacted new laws. Wyoming has passed legislation allowing for DAOs to be formed as “DAO LLCs.” Tennessee has passed a similar law allowing for Decentralized Organizations, or “DO’s.” These entities can be formed with the Secretary of State and provide the same asset protection as LLCs. Utah also passed a similar act that allows for the creation of “limited liability decentralized autonomous organizations,” or “LLDs” for short.

Proponents say that this smart contract management makes the DAO easier to be managed remotely, more efficient to govern, and removes any management conflicts between humans. While these things may be true, there are five reasons why we here at Corporate Direct do not recommend forming DAOs for our clients.

    1. The Smart Contract is open-sourced

The first reason is that the smart contract is available for public view. Because the smart contract is on the blockchain ledger, anyone can see how your DAO is being managed. On top of this, the Wyoming Secretary of State requires DAO applicants to include the smart contract’s public identifier when forming the DAO LLC. So anyone can see your LLC’s roadmap. Do you want the world knowing how you distribute profits? Unlike a DAO’s smart contract, an LLC’s operating agreement or a Corporation’s bylaws are not available for public view. Every other entity provides this type of privacy. DAOs do not, which is why we stay away from them.

    1. The DAOs can still be hacked

Second, DAOs can still be hacked, even with a smart contract in place. This happened in the California case of Sarcuni v. bZx DAO. In Sarcuni, people deposited digital tokens into the bZx DAO in exchange for membership interests. Over time, the DAO accumulated over $50 million worth of these tokens.

One day, one of the members received a phishing email from a hacker. After the member opened the email, the hacker was able to access the member’s private key and take $55 million worth of funds from the DAO. One would think that the DAO’s smart contract would have stopped this transfer. But that was not the case. In fact, the DAO had lost $9 million in three previous hacks.

On top of this, the court also found that because the DAO is not a recognized entity type under California law, DAO’s are treated as general partnerships. This means that if the DAO is sued, each of its members are personally on the hook for any liability. Was anyone sued personally for the loss of $64 million in the Sarcuni case? Under California law, they could be.

Given the recent rise in computer scams, any business can be a victim to them. But because DAOs with smart contracts face these same risks, they are a much less appealing option. Even worse, if your state doesn’t recognize DAOs, any member is individually liable for any claims brought after the DAO has been hacked.

    1. The law still applies to DAOs and their owners

We also don’t recommend the DAO since they may still be subject to other regulatory requirements, even when its owners try to avoid them. This happened in the case of Commodity Futures Trading Commission v. Ooki DAO. In Ooki, BZero X LLC operated a trading platform where people would exchange virtual currencies on the blockchain network. In an attempt to avoid regulatory oversight from the CFTC, BZeroX transferred their protocol into the Ooki DAO. After this move, the CFTC filed suit against Ooki.

The court found that because the DAO traded commodities, the DAO was subject to regulation under the Commodity Exchange Act (CEA). On top of this, the court found that under the CEA, DAOs are treated as unincorporated associations. Like general partnerships, this also means that Ooki’s members are subject to personal liability.

While people may think that they can use DAOs as a conduit to avoid the law, they are sorely mistaken. You are much better off using a traditional LLC.

    1. DAO owners can be personally liable if the DAO is sued

In states that do not have DAO legislation on the books, DAO owners can be personally liable if the DAO gets sued.

The Sarcuni court found that DAOs are treated like general partnerships. In addition, the Ooki court found that DAOs are treated like unincorporated associations under California and Federal law. In both of these cases, after the DAO was sued, all of its owners were personally liable for any judgment entered against each DAO.

From a liability standpoint, this is disastrous for every DAO member. However, members of properly formed LLCs and Corporations do not have to face this issue. If those entities are sued, their owner’s liability is limited to their capital contributions. Not so in states that don’t recognize the DAO as its own entity.

    1. There is too much legal uncertainty with DAOs

The fifth and final reason for DAO avoidance is that there is too much legal uncertainty associated with them. Only three states have DAO laws on the books. Because of this, there are neither enough regulations nor enough case law to regard DAOs as a safe entity to recommend to our clients.

There are simply too many unknowns at this point in time. And we don’t want our clients to be the test cases.

Conclusion

There is a chance that some of these things may change in the future. Additional states could pass legislation that treat DAOs like LLCs with their own liability protections. Smart contracts could do a better job of stopping hackers. Lawmakers and agencies may also enact clearer regulations regarding DAOs. But because people face these issues when forming DAOs now, we do not recommend them for our clients.

Corporate Direct has a weekly YouTube segment called Direct Answers from Corporate Direct

In this segment, we educate people on corporate law, business formation, real estate, wealth building, and asset protection. And if you have any general questions about something, please feel free to leave a comment on one of our videos!

For more of these updates, click the link below and subscribe to our YouTube channel.

The Corporate Transparency Act

The Corporate Transparency Act

By: Ted Sutton, Esq.

The Final Rules Are In – New Requirements Ahead for Every Corporation, Limited Partnership, and Limited Liability Company 

Introduction 

Powertainment, LLC is a profitable company that helps aspiring entrepreneurs become the best version of themselves. It was founded by Patrick, Tom, and Adam. The three of them each agreed to own 1/3 of the LLC’s membership interests. Robert, a friend of theirs, comes to the company 45 days later. While he doesn’t own any membership interests, he has agreed to be the manager of Powertainment.

Each of the four men have different backgrounds and different areas of expertise. This wide range of available knowledge has resulted in Powertainment’s success. On top of employing 18 employees, the company generated over $6 million in revenue in the past year.

Tom recently found out from a friend that Congress passed the Corporate Transparency Act (or ‘CTA’). Nervous of what it would do to Powertainment, he went to the other three to voice his concerns. How would it affect their business? How would they have to report personal information to the government? What penalties would they face if they failed to comply?

The answers to each of these questions follow.

Corporate Transparency Act 

The CTA was enacted (said the bill’s sponsor) “to combat malicious actors using shell corporations” to move illegal funds throughout the United States. Many policy makers believe the CTA will deter criminals and their criminal acts. However, the effectiveness of this Act is yet to be seen.

The CTA requires both companies and beneficial owners to submit a report to the Department of Treasury’s Financial Crimes Network (FinCEN). Both requirements are discussed below.

Company Requirements 

So which companies are required to file? Under the CTA, companies must file if they are either formed by filing a document with the secretary of state or similar tribal office, or formed in a foreign country that’s registered to do business in the US. The Act also states many exemptions, most notably the “large operating companies” exemption. The requirements for being a “large operating company” include employing more than 20 full-time employees, accruing more than $5 million a year in gross receipts or sales, and operating from a physical office in the US. If your business meets these three criteria, you are exempt from filing.

While Powertainment meets two of the three requirements of a “large operating company”, it only employs 18 people. Thus, the exemption doesn’t apply to them. Powertainment must still report to FinCEN.

Beneficial Ownership Requirements 

So who exactly is a beneficial owner of the company? The CTA lists out two criteria, each being sufficient on its own to meet the Act’s definition. The first criteria mandates FinCEN notification for individuals owning or controlling at least 25% of the reporting company’s ownership. The second criteria requires reporting someone (and not necessarily an owner) who exercises “substantial control” over the reporting company.

This begs the question: What constitutes having “substantial control” over a company? It can encompass many different forms. It can mean serving as a company officer, having the power to appoint or remove members, making decisions for the company, and exercising “substantial influence” over the company’s important matters. In addition, the government can also look at other characteristics not listed to determine if an owner has “substantial control” over the company. Clearly, this definition is not entirely definite.

Because Patrick, Tom, and Adam each own 1/3 of the LLC, they automatically meet the 25% requirement. They must report as individuals. On the other hand, Robert does not own any interest in the LLC. But because Robert serves as the manager and is thus a company officer of Powertainment, he must still report. And, because he came to the company after the first report was filed, Powertainment must file an amended report within 30 days of his hiring.

What must be Reported 

There are two reports that need to be submitted to FinCEN. First, companies must report four information items. These include:

  • The company’s name and any trade name or DBAs (if applicable)
  • The business street address
  • The formation jurisdiction, and
  • A “unique business number” (This can be a company’s EIN number from the IRS)

Second, beneficial owners must report four information items. These include:

  • The name of the beneficial owner
  • Their birthdate
  • Their residential street address, and
  • A “unique identifying number” (This can be either a passport or a driver’s license, a copy of which must be submitted)

For companies formed before January 1, 2024, they must report this information before January 1, 2025. For companies formed after January 1, 2024, they must report this information within 30 days after receiving notice of the entity’s creation. As well, anyone who files the documents creating the company, such as a lawyer or paralegal, must have their information reported.

Because Powertainment was in existence before January 1, 2024, these reports are due by January 1, 2025. Here, Powertainment would have to report all four information items as the company. On top of this, Patrick, Tom, Adam, and Robert would each have to report all four information items as beneficial owners. A total of five reports, all for one business. For businesses with more people having substantial control, that number is even higher. If Powertainment has a change in ownership, or hire more people with substantial control over their operations, they have 30 days to file an amended report.

Penalties for Not Filing 

What’s the point of passing a federal law if there are no penalties? The CTA has its fair share of them, and they are steep if you don’t report. Fines can be up to $500 a day after the reports are due and can even accumulate up to $10,000. Even worse, you can be sentenced to prison for up to 2 years for failing to comply. Mere negligence here can lead to a criminal violation.

Let’s say that the Powertainment owners shift their ownership percentages and bring on a new vice president who now exercises substantial control. As mentioned, an amended report to FinCEN is due within 30 days. Like many Americans who forget about the numerous federal reporting requirements, if the Powertainment team forgets to report they may soon owe the government $10,000 in penalties. The government may grant no leeway in this situation. When the Act takes effect, everyday Americans could face significant consequences for not complying.

Conclusion

The CTA has far-reaching effects. Almost every entity ever formed will have to comply in some fashion. Will Congress’s aims actually work? Or will the bad guys figure out a way around the rules, leaving millions of American businesses with yet another government burden?

The CTA seems unlikely to be repealed. Fortunately, we at Corporate Direct are here to help. Starting in January of 2024, we can prepare your initial and amended reports and submit them to FinCEN. Feel free to contact us for more details.

 

How LLCs Can Protect Doctors

By: Ted Sutton

Doctors are frequent targets of medical malpractice suits. This is why many of them have malpractice insurance to cover these claims. But what happens when the insurance does not cover the full amount? In this situation, the last thing doctors want is to have their personal assets exposed. Fortunately, doctors have a few options to protect their assets.

Forming an LLC for their Practice

The first thing doctors can do is set up an entity for their practice. The entity must be formed in the state where the doctor is licensed to practice, and each state has different requirements. Some states allow doctors to simply form an LLC for their practice. Others such as California require doctors to set up a Professional Corporation (PC). A third group of states, including Illinois, require doctors to set up a Professional Limited Liability Company (PLLC). For the latter two categories, entity owners must be licensed members of their respective profession.

Forming an LLC for their personal assets

Using an entity for a medical practice is useful to protect against a slip and fall or other accidents on the premises. But what happens when the doctor is sued personally? A malpractice claim is personal, meaning the doctor can’t hide behind the entity. The patient, after collecting against malpractice coverage, can reach the doctor’s personal assets. Having a separate LLC for personal assets can prevent an easy taking.

To insulate from personal liability, many doctors use LLCs to hold title to personal assets, including stock portfolios and real estate holdings. But the patient may still attach the doctor’s interest in the LLC to pay their claim. Choosing which state to form the LLC makes the biggest difference in what the patient can collect.

Form an LLC in a Strong State

Some states, including Wyoming, offer better protection for one simple reason: the charging order. This order only allows the patient to collect any distributions the doctor may receive, and gives them no right to participate in the LLC’s management.

In Wyoming, the charging order is the only way that the patient can collect anything from the LLC. You do not have to make any distributions from a stock portfolio. So if no distributions from the LLC are made, the patient collects nothing. This can aid doctors, especially if the LLC holds valuable assets.

Other states, including California, have weaker protections. Contrary to only allowing the patient to receive distributions, a California court may force the sale of the doctor’s LLC to pay the claim. Do doctors want this to happen? Of course not, and fortunately, this scenario can be minimized. By forming the LLC in a state with better protection, the doctor is better protected.

Conclusion

Doctors must not only consider an entity for their practice, but also an LLC for their personal assets. When faced with a claim, these considerations make the difference between how much or how little a claimant can collect.

Design Your Asset Protection Plan

You design a lot of things in your life. The layout of your house, the flow of your business, the requirements on your children, and many more scenarios are all elements of conscious design.

Asset protection is no different. There is an architecture, a cohesive structure, to your properly planned legal safeguards. Sometimes you try and do it yourself, which could be fine. Many people are into DIY. And yet, with all the asset protection misinformation on the internet, you’ve got to be careful. Does that overpriced ‘guru’ really know what they’re doing? You won’t know until the plan they’ve designed holds. Or fails.

Designing your asset protection plan does not improve with setting up more entities than you need. When your plan is solid with three LLCs, who benefits by adding 5 more LLCs to the mix? I know you will answer that question correctly.

Your effective design should never be a matter of confusion to you. If you don’t understand what your asset protection planner is suggesting, demand a clear explanation. If they respond that most attorneys and no clients will ever understand their ‘brilliant’ structure, get up and walk out. That’s not how it works. As well, if you ask to get a second opinion from another lawyer about the plan and they claim that no lawyer will even begin to comprehend what they’ve put together for you, as a special client and part of the elite inner circle, it is also time to leave. You need to clearly understand the plan. And so does your spouse.

Sometimes, like an old bridge, a plan design has fault lines. The structure appears fine, until it collapses under pressure. This can be the case with land trusts. Promoters tout them for their asset protection benefits while they offer no such feature. To cover this inconvenient issue, they suggest that one or more land trusts be beneficially owned by one LLC. The structure appears as follows:

Land Trust Structure

How will this structure hold up?

When a tenant in the duplex is injured on the property, they have the ability to sue the land trust for their damages. Some promoters claim that the tenant will never know the owner of the land trust because such information is confidential. Without exaggeration, this is one of the greatest legal fallacies in history. If the tenant’s attorney can’t locate the land trust owner all they have to do is publish notice of the lawsuit in the paper. It is very easy to do. And if the owner doesn’t respond to the lawsuit the tenant can win by default. You’ve lost the case and they are foreclosing on the property. “Well,” says the land trust promoter as they close shop and move 1,000 miles away, “I guess that didn’t work.”

Contrary to what these promoters may suggest, you don’t want to hide. You actually want to be found if needed, so that you can receive the notice of a lawsuit. You want to promptly turn the claim over to your insurance company so they can defend you and hopefully settle the case. If you hand them the claim after a default is entered in virtually all cases they don’t have to cover you. You didn’t give them proper notice of the lawsuit. Your design flaw is not their problem.

There is another design flaw in the structure above. Let’s say the promoter acknowledges that an LLC needs to be in the mix for its benefits of limiting liability. So, the beneficial owner (a required feature of land trusts and akin to a shareholder in a corporation or a member in an LLC) is listed as XYZ, LLC. When Land Trust #1 is sued by the tenant the liability flows to the beneficial owner, or XYZ, LLC.

Now if XYZ, LLC were on title to the property instead of the land trust, the liability would be contained within that one LLC. But in our design flawed structure, the liability flows from the land trust into the LLC. What does the LLC own? Not only Land Trust #1 but also Land Trust #2 and Land Trust #3. So the tenant can also get what the LLC owns, which is equity in all three land trusts. “Well,” says the land trust  promoter as they prepare to move to Alaska, “that didn’t work either.”

As is clear, the design of your asset protection plan really does matter. When building it listen to your little voice, the one that is always there and always protective. If the proposed plan doesn’t make sense, if it doesn’t add up, think again. Get another opinion. Your asset protection is too important to be left to unquestioned amateurs.

Corporate Direct, on the other hand, does not advise using land trusts or any overly complicated structures. We have been in the business of asset protection for over 30 years and we can help you structure your entities correctly and in a straight forward and affordable manner. Get your free 15-minute consultation to get started today!

Asset Protection for Gold, Silver and Precious Metals

Gold, silver and other precious metals require asset protection.  We live in a litigious and uncertain society, which is most likely one of the reasons you invested in precious metals in the first place.  It is important to know that if gold, silver, platinum and other metals are held in your individual name, they too can be lost in a lawsuit.

LLC, a Gold Standard for Precious Metal Asset Protection

By using an LLC to hold title to your precious metals you have much greater protection.  With precious metal assets in an LLC, if you are sued individually a judgment creditor (the person who won the lawsuit) has to fight through the LLC to get at the assets.  This is a difficult process.

The Strength of Wyoming LLCs

By using a Wyoming LLC, all the judgment creditor can get (after hiring a Wyoming attorney to go to court in Wyoming) is a charging order.  The charging order is a court order directing the judgment creditor to receive any distributions made from the LLC. This means they can’t force you to sell the metals and give the money to them.  All it allows is for monies – when distributed – to go to the judgment creditor.  In the case of precious metals what distributions will be made?  You typically would not be distributing your gold, silver or platinum.  Instead, you are holding them in the LLC for protection.  You are free to hold them in the LLC until the judgment creditor goes away or settles for pennies on the dollar.  More importantly, by holding valuable precious metals in an LLC the claim may never be brought in the first place.  LLCs offer gold asset protection, silver asset protection and precious metals asset protection.

Privacy and LLCs

Another important feature of the LLC is privacy.  Wyoming law allows for nominee managers, whereby another person is listed as the manager, thus keeping your name off the public records.  (It is both incredible and disturbing what people can find out about you on the internet.)

Our nominee manager is a professional living outside the United States.  She won’t know about or have access to your precious metals.  That is between you and your gold and silver dealer.  But by using a nominee your name stays private, which is an excellent strategy these days.

Title to your gold and silver must be in the name of the LLC for you to have protection in place.  There are two ways to do this.  First, you can form the LLC and buy the precious metals in the name of the LLC.  (We have LLCs already formed for this purpose if you are in a hurry.)  By purchasing metals in the name of the LLC the chain of title is clear.  Or, if you already own the metals in your name or now buy them in your name, you can later transfer title to your LLC.  The preferred way to do this is a transfer agreement signed before a notary.

Wyoming and Nevada have the most protective LLC laws.  The difference is price in the form of annual fees.  Nevada is more than $300 per year versus less than $100 per year for Wyoming.  With our resident agent fee of $125 for either Nevada or Wyoming, total annual cost is nearly $500 for Nevada versus just under $200 per year for Wyoming.  

Qualifying to Do Business May Be Optional

But unlike other situations where protection is also required – rental real estate, for example – with precious metals, you don’t need to qualify to do business in the state where the assets are located.  With precious metals your LLC’s business is protecting assets not operating a business.  And a Wyoming (or Nevada if you want) LLC is all you need, no matter what state you are in.  That said, California can present challenges, so be sure and speak with an account representative about your specific situation.

Tax Considerations

Tax wise you won’t pay any extra taxes by using an LLC to hold gold and silver.  Since the LLC is a flow through tax vehicle, taxes on gains will be taxed to you personally, just as if you held it in your individual name. The difference is with an LLC you have asset protection.  By holding gold and silver in your individual name (or even in your living trust) you are exposed.

Misconceptions of IRAs

Many people are using IRAs to hold their gold and silver.  There is a misinterpretation that IRAs offer complete asset protection.  In actuality, it is much more complicated.  Federal law protects IRAs up to only $1 million but state laws can reduce that amount.  For example, in Nevada only $500,000 in IRA accounts is protected.

The better practice is to have your self directed IRA form an LLC to hold the gold and silver.   A graphic example is as follows:

Self Directed IRA
(owns LLC)

In this structure, if you were to be sued individually, a judgment creditor (or bankruptcy trustee) could seek your IRA assets.  If they can get past the IRA they still have to fight to get through the LLC.  You have much better protection using an LLC to hold your IRA assets.

All told, gold, silver and other precious metals deserve asset protection.  At just under $200 per year to maintain a Wyoming LLC, you are buying the best asset protection insurance possible.

For more information, schedule a consultation today!