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Ultimate Guide to Vetting a Business Partner

By Gerri Detweiler

After surviving several tumultuous business partnerships, Susan Nilon has learned to be more skeptical and cautious. In the past, she admits she was so excited about business possibilities that she “didn’t pay attention to red flags.”

She and her current business partner in a legal research firm, De Novo Law Services, not only have a formal partnership agreement, they’ve taken it one step further. She created an addendum to the agreement “writing out 10 steps on how to survive our partnership,” she says. This document spells out the things that are not normally called out in a contract, like how to handle disputes and what to do when the other partner is not pulling their weight.

Business partnerships can bring together individuals whose complementary skills and experience can help the venture succeed. And sometimes a partner can contribute valuable resources — including money — to help fund the business. But these arrangements can also result in headaches or heartache.

Here are nine ways to vet a potential business partner and (hopefully) avoid those headaches:

Do Your Own Recon

Spend some time researching your prospective partner online. Review their social media accounts. Do their tweets or Facebook posts jive with the person you think you’ll be working with? Do you want to be professionally associated with them? Be sure to go back a while in their timeline: there may be older information they forgot about that provides valuable insight into their thinking and character. And don’t overlook a social media platform just because you don’t use it yourself.

Similarly, when you conduct your online search into their background, don’t stick to one search engine. Dig a little deeper. “Different articles will be highlighted on different search engines,” says Nilon.

Have ‘The Talk’

“What do you really want out of this relationship?” It’s that awkward question that often comes up when dating. That question, along with “What do you really want out of this business?” can be just as awkward. But it’s essential you have that conversation.

It’s “truly like a marriage,” Nilon points out. Avoiding these difficult conversations can have long-term consequences. She compares it to a relationship where “you don’t talk about wanting children before you get married. If you find out your partner doesn’t want kids and you do, the relationship might not survive.” She adds: “Knowing how you see the future and communicating that to the other is a key step to avoiding disappointments.”

With more than twenty years of experience in human resources, Ben Martinez knows as well as anyone how crucial it is to find the right people to work with. But even he learned the hard way how challenging that can be. He runs two very different businesses — STS Talent (an HR and recruiting firm for high tech businesses) and Sumato Coffee Company.

When he founded Sumato Coffee, he brought in a business partner he had worked with in the past. She was smart and capable, but he discovered she was in a different phase of her life than he. It was soon apparent that she wanted to devote more time to building her corporate career. “We had to part ways,” he says. In hindsight, he wishes he had asked more questions about what she wanted out of the business and her life.

Another partner he brought in later loved the product but he discovered she wasn’t as excited about all the work that goes into building a business. “She was mainly in it for the money,” he observed. “She was passionate about coffee and ecommerce but the work ethic wasn’t there.” He parted ways with her, too.

Have a Money Talk

Figure out how to handle money up front. What do each of you bring the the table and how do you value that? How much do each of you get paid, and how long can each of you go without receiving a steady paycheck?

“In an LLC you can provide profits based not on the percentage of ownership but on the amount of time spent in the business,” explains Sutton. “And even with an S corp you could have a salary or bonus based on the amount of hours put in. The person that doesn’t contribute wouldn’t receive as much compensation. Then buy sell agreement could allow a partner to buy back the shares at low value” if one partner wants to get out.

Check Credit

You can check business credit on any business, so if your future partner is an entrepreneur, consider at least running a commercial credit check on their businesses. (This guide explains how to check business credit on another business.)

While there are dozens of places you can check your own credit for free, it’s not as easy to check someone else’s personal credit, and you’ll first need to get permission from your future business partner. In fact, unless your run a business that already obtains credit reports on job applicants, they will likely have to get their own report and share it with you.

Run a Background Check

Your local courthouse can be a source of information about lawsuits or other public record information. However, keep in mind this information will be limited to actions taken in that jurisdiction. And it may even be inaccurate. It’s not unusual for people with similar names to be mistaken for one another for example. (Millions of court judgments have been removed from credit reports recently because they couldn’t be thoroughly matched to the right person.) “Courts do not conduct criminal background checks,” warns the National Center for State Courts on its website.

For those reasons, purchasing a full background check that you both agree to review together may be a better bet. A background check that includes credit, criminal proceedings and other details will likely require the permission of the person on whom you request the report so be upfront with your request.

Every business owner interviewed for this article agreed that background checks can be useful. “Certain crimes could prevent you from raising money or obtaining government licenses,” points out Caton Hanson, cofounder and chief legal officer of Nav. And “IRS or states taxing authority problems could get you entangled with their problems,” he warns.

If you’re serious about the business and willing to spend the money, you may even want to hire a private investigator who can dig up more than you can likely find out on your own.

Do a Compatibility Check

Even if your partner is squeaky clean that doesn’t mean the two of you will work well together. Different personal and working styles can quickly drive a wedge in the relationship.

One big wedge driver: a partner who feels entitled because they came up with the idea for the business. “People put too much value on whose idea it was,” says Hanson. “Ideas are a dime a dozen. There are two things that matter: money and work. You can’t have a successful business without them.”

Hanson’s business partner Levi King and he have developed something they call the “St. George test.” It basically means asking themselves to imagine a 3-4 hour drive from Salt Lake City, where Nav’s primary office is based, to St. George, Utah with that person. “Could you do it and not go crazy?” Hanson laughs. “You need to really like your business partner.”

You can also use more formal assessments such as personality or work style tests. Consider springing to get them professionally administered and reviewed by an HR professional or someone trained to analyze and help interpret the results.

Hanson says King had him take a sales aptitude test and a personality quiz to “make sure we didn’t clash.” Martinez says these types of tools can be helpful to raise awareness of your partner’s styles or to find complementary work styles but it’s important to “get clear on what you are using it for.”

Try a Practice Run

If one of you has an existing business, consider hiring the other person for a project or limited period of time to see whether you work well together. It’s not foolproof, though, as Martinez learned. It’s probably more like dating than marriage — with both partners trying to make a good impression — but you will be able to get a better sense of how you might work together.

That’s what Hanson and King did. King hired him to work for him in a different company before they founded Nav together. “The work we did was almost like working together like business partners,” Hanson says. It gave them confidence that they could indeed succeed as partners.

Get it in Writing

If you’ve decided to proceed with a partnership, spring for a formal partnership agreement written by an attorney. Hanson shared the story of a business he knows that won an award that earned them a lot of attention, and eventually they were able to raise venture capital. The partners had no written partnership agreement, however.

“One of the partners was sitting at home playing video games,” he says. But because he owned shares in the company, the partners had to buy him out.

Even though you may still be in the starry-eyed stage, think through some worse case scenarios.

What happens if the partner dies, becomes incapacitated or needs to get a full-time job to support themselves or their family, for example. “You can create a buy sell agreement that says if one person abandons the projects they lose all their shares,” explains Sutton. “If they commit fraud they are out of the business. If they get divorced, only the person you entered the deal with can be an owner — the spouse can’t be granted those shares. A good attorney can prepare a buy sell agreement that can cover all these contingencies,” he advises.

About the Author — Gerri Detweiler serves as Head of Market Education for Nav, which provides business owners with simple tools to build business credit and access to lending options based on their credit scores and needs. She develops educational programs and content for small business owners, and works on advocacy initiatives. A prolific writer, her articles have been featured on popular websites such as Yahoo!, MSN Money, ABCNews.com, CBSNews.com, NBCNews.com, Forbes, The Today Show website and many others.

Protect What’s Yours: The Top 10 Benefits of Incorporating Your Business

Starting your business from scratch is a big deal. There are a million details to take care of, and the list of demands can seem endless. Small business owners have to hire employees, worry about taxes, and find ways to maximize profits while keeping costs as low as possible. Every smart business owner should consider the benefits of incorporating. This is an important decision that has a significant financial impact. Let’s take a look at the reasons why this is a smart move by helping you understand a few of the benefits.

Protect What’s Yours: The Top 10 Benefits of Incorporating Your Business

Have you heard about business incorporation but aren’t sure why it’s worthwhile? Read on to learn the top 10 benefits of incorporating your business.

1. It Protects Your Personal Assets from Lawsuits

Incorporating creates a safety barrier between you and your business. This is important because believe it or not, if you don’t incorporate your business, you run the risk of losing your personal assets when sued. Incorporating protects your personal assets if a lawsuit is filed against you.

2. It Protects Personal Assets From Creditors

Incorporating also protects your personal assets from creditors wanting to collect on business debts. This is accomplished by forming an LLC, or a C or S Corporation that protects your personal property in the event that your business falls on hard times. When not incorporated, your personal property will be automatically linked to your business, including your home, investment accounts, cars, as well as future assets.

3. It Makes It Easier to Transfer the Business

Someday you may wish to sell your business or pass it on to a member of your family. Or perhaps you will get sick and no longer have the energy to continue running things. This is something many people don’t think about until they are near retirement. When you are running a sole proprietorship, all of your personal property is linked to your business, making it very difficult to value the business or transfer it to someone else. Incorporating makes this process much easier.

4. It Allows Your Business to Grow Long After You’re Gone

The reality is that you won’t be around forever. Despite this, you will likely wish for your business to flourish long after you’ve passed away. When you are incorporated, probate won’t touch the business directly. The business will simply go directly to the new owner assuming you have the proper documentation in place.

5. It Has Huge Tax Benefits

Incorporating also offers massive tax benefits, such as the ability to deduct travel expenses and Social Security taxes that you’re paying into the system, deduct business losses, and claim some daily expenses required to operate the business. Keep in mind that when you make the transition from being a partnership or a sole proprietor to an LLC or similar business structure, there are a multitude of deductions available to you that weren’t at your disposal as an individual.

6. It Makes It Easier to Raise Investment Capital

Another significant advantage of incorporating your business is the access it gives you to raising vital capital. The ability to borrow money is very important to any business, and being incorporated adds a legitimacy that helps when applying for loans. It also allows you to open bank accounts and establish lines of credit that will make it easier and more efficient to operate your business.

7. It Makes it Easier to Sell Your Business

Incorporating also adds legitimacy to your business in other ways. Sole proprietors simply aren’t as attractive to potential buyers. This is due to the fact that corporations are easier to track and manage, and they tend to be more stable. These are things that are of the utmost importance from an investor’s perspective. Being incorporated also gives you a leg up when there are competing businesses that a buyer might be interested in.

8. It Helps Protect Your Brand

When it comes to owning a business, branding is everything. Keep in mind that if you don’t take the necessary steps to protect your brand, it’s possible for someone to swoop in and steal it. That’s why incorporating is also important for protecting your brand. This includes everything from your business name, slogans, logos, and colors that represent your brand, to trademarks and any designs that distinguish your business from everyone else. Not sure if you’ve got a brand worth protecting? There are some tweaks you can do immediately to improve your brand.

9. It Makes Establishing Retirement Accounts Easier

When you own a business, you want to make sure that you and your employees are taken care of beyond a basic paycheck. Many companies provide health savings accounts and retirement accounts to help employees plan for the future. Incorporating makes this process less expensive due to tax-advantages, and there is far less red tape involved in setting these types of accounts as a corporation compared to a sole proprietorship. And even if you don’t have employees, there are still plenty of advantages to setting up accounts for yourself by incorporating your business.

10. It Helps Protect Your Privacy

One of the biggest benefits of incorporating your small business is something you might not have considered. When your business is incorporated, you’re better able to keep your personal information hidden. This is especially vital for companies who need to closely protect trade secrets. For many companies, this level of privacy is what helps them maintain an edge on the competition. Incorporating allows you to keep all of your business affairs private, and they will be kept completely confidential unless you make the decision to disclose them.

Taking Your Business to the Next Level

When you take the time to consider the benefits of incorporating, it really doesn’t make sense not to. After all, the advantages of incorporation not only include ways to save money, they also provide brand protection and allow you to more effectively manage the long-term needs of your employees. As you can see, there are plenty of good reasons to incorporate, and far fewer reasons not to. So take your business to the next level by incorporating! For more helpful information, click here to learn 11 tips for establishing credit for your company.

State Franchise Fees: Beware of Delaware’s New Rules

Delaware’s New Rules Are a Cost To Consider When Forming Your Entity

Delaware recently increased the various fees assessed by their Secretary of State as Annual Franchise Tax Fees for Delaware corporations. While the changes do not apply to Limited Liability Companies (LLCs) or Limited Partnerships (LPs), and religious and charitable non-stock corporations remain exempt from the tax, the increased fees for corporations must be considered when forming an entity.

All corporations incorporated in the State of Delaware, irrespective of whether they actually do business in the State of Delaware, must file an Annual Franchise Tax Report and pay an Annual Franchise Tax. The Annual Franchise Tax is calculated on capital stock, and it is levied on corporations even if they are not producing any income.

The changes in the new law are fourfold: (1) the Franchise Tax Cap has been increased; (2) the Authorized Shares Method for calculating the Annual Franchise Tax has been modified; (3) the Assumed Par Value Capital Method for calculating the Annual Franchise Tax has been modified; and (4) the Late Penalty has been modified.

1. Franchise Tax Cap

Effective for Fiscal Year 2018, the Franchise Tax Cap has been increased to from $180,000 to $200,000 per year ($250,000 per year for some large corporate filers). It should be noted that LLCs and partnerships only pay $300 per year. But corporations with a large number of shares must take note.

2. Authorized Shares Method

There are two ways to calculate what you owe Delaware each year. The first focuses on how many shares you have authorized.

Under this method, the rate presently is $175 for a corporation with 5,000 authorized shares or less; $250 for a corporation with 5,001 to 10,000 authorized shares; and $75 for each additional 10,000 shares or portion thereof. Effective for fiscal year 2018, HB 175 has increased this rate from $75 to $85 for each additional 10,000 shares of portion thereof. For example, a corporation with 1,000,000 authorized shares now will owe $250 for the first 10,000 shares, plus an additional $8,415 ($85 times 99), for a total due of $8,665, plus $50 for the Annual Report Fee. These thousands of dollars compare with Wyoming’s annual fee of just $50.

3. Assumed Par Value Capital Method

Delaware also employs an alternative method for calculating the Annual Franchise Tax. This method is denominated as the Assumed Par Value Capital Method, and a taxpayer is free to use either method, and use whichever amount is less. The Assumed Par Value Capital Method is difficult to compare to the Authorized Shares Method because it necessarily makes certain assumptions about total gross assets. It is also difficult to calculate, period. Here is an example of how it works:

To use this method, you must give figures for all issued shares (including treasury shares) and total gross assets in the space provided in your Annual Franchise Tax Report. Total Gross Assets shall be those “total assets” reported on the U.S. Form 1120, Schedule L (Federal Return) relative to the company’s fiscal year ending the calendar year of the report. The tax rate under this method is $400 per million or portion of a million. If the assumed par value capital is less than $1,000,000, the tax is calculated by dividing the assumed par value capital by $1,000,000 then multiplying that result by $400.

The example cited below is for a corporation having 1,000,000 shares of stock with a par value of $1.00 and 250,000 shares of stock with a par value of $5.00, gross assets of $1,000,000.00 and issued shares totaling 485,000.

  1.  Divide your total gross assets by your total issued shares carrying to 6 decimal places. The result is your “assumed par.” Example: $1,000,000 assets, 485,000 issued shares = $2.061856 assumed par.
  2.  Multiply the assumed par by the number of authorized shares having a par value of less than the assumed par. Example: $2.061856 assumed par, 1,000,000 shares = $2,061,856.
  3.  Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value. Example: 250,000 shares $5.00 par value – $1,250,000.
  4.  Add the results of #2 and #3 above.  The result is your assumed par value capital.  Example: $2,061,856 plus $1,250,000 = $3,311,856 assumed par value capital.
  5.  Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000, by 1,000,000 and then multiply by $400.00. Example: 4 x $400.00 = $1,600.00.
  6.  The minimum tax for the Assumed Par Value Capital Method of calculation is $400.00.

As you can see, the calculation is pretty complicated. Be sure to work with your tax advisor to get it right. Or maybe incorporate in another state without such rules and fees.

The new law increased the minimum amount of Annual Franchise Tax that is due and payable by a Delaware corporation under this alternative method. The minimum amount of Annual Franchise Tax for a Delaware corporation now is $400 per year, effective for fiscal year 2018.

4. Late Penalty

The new law has increased the Late Penalty from $125 to $250.

A COMPARISON

As noted above, the minimum amount of Annual Franchise Tax now payable by a Delaware corporation is $450 per year, effective for fiscal year 2018. It is informative to compare this $450 per year minimum amount of Annual Franchise Tax to similar taxes and fees in the States of California, Nevada and Wyoming.

1. California

California has taxes: corporate and personal income tax, California Alternative Minimum Tax, and California Franchise Tax. California Franchise Tax applies to LPs, LLPs, S and C corporations, and LLCs. All pay a minimum amount of $800 per year. But then other taxes kick in depending upon entity type. For S corporations, the California Franchise Tax is 1.5% of the S corporation’s net income, along with the minimum tax of $800 per year. For California LLCs, California Tax is a flat fee, based upon California gross income, plus an Annual Franchise Tax of $800 per year, regardless of income, calculated, as follows:

  • Gross income less than $250,000 – $0 + $800 = $800
  • Gross income from $250,00 to $499,999 – $900 + $800 = $1,700
  • Gross income from $500,000 to $999,999 – $2,500 + $800 = $3,300
  • Gross income from $1,000,000 to $4,999,999 – $6,000 + $800 = $6,800
  • Gross income over $5,000,000 – $11,790 + 800 = $12,590

California C corporations and LLCs electing to be treated as C corporations are subject to the $800 minimum fee plus the California State Corporate Tax of 8.84%, based upon California net income. As well, they are subject to a 6.65% California Alternative Minimum Tax (AMT), based on the Federal AMT, with modifications. If you do business in California, expect to pay some of the highest taxes in the nation.

2. Nevada

Nevada no corporate or personal income tax, and there is no franchise tax for corporations or LLCs; however, there are initial filing fees, renewal filing fees, and a business license fee.

The initial filing fee for a Nevada for-profit corporation is based upon the value of the total number of authorized shares, as follows:

  • $75,000 or less – $75.00
  • Over $75,000 and not over $200,000 – $175.00
  • Over $200,000 and not over $500,000 – $275.00
  • Over $500,000 and not over $1,000,000 – $375.00
  • Over $1,000,000
    • For the first $1,000,000 – $375.00
    • For each additional $500,000, or fraction thereof – $275.00
    • Maximum fee – $35,000.00

To get around these fees you can establish a value of $.001 per share. With 20 million shares at $.001 per share the value of the shares is just $20,000, well under the $75,000 threshold for increased fees. In Delaware you would pay much more every year for that many shares.

The renewal filing fee for a Nevada for-profit corporation is $650, calculated, as follows: (1) Annual List of Officers and Directors – $150; and (2) Business License Fee – $500. Nevada how also has a gross receipts tax on monies generated within Nevada. The tax starts on monies earned at $4 million per year and is dependent on what industry or business you are involved with. Work with your tax advisor to see if this tax would apply to you.

The initial filing fee for a Nevada LLC is $425, calculated, as follows: (1) Articles of Organization – $75; (2) Initial List of Managers of Members – $150; and (3) Business License Fee – $200.

3. Wyoming

Likewise, Wyoming has no personal or corporate income tax. Unlike Nevada, the Equality State has no gross receipts tax. Wyoming does have an Initial Filing Fee of $100, and an Annual Report License Tax for Wyoming for-profit corporations and LLCs, which is either $50 or two-tenths of one mill per dollar of assets ($.0002), whichever is greater, based upon the company’s assets located and employed in the State of Wyoming. For example, a Wyoming for-profit corporation or LLC with $1,000,000 in assets in Wyoming would pay an Initial Filing Fee of $100, a Registered Agent Fee of $25 per year, and $200 per year in Annual Report License Tax ($1,000,000 x 0.0002). For most of our clients the annual Wyoming fee for corporations and LLC’s is just $50 per year.

CONCLUSION

As demonstrated, the number of authorized shares greatly impacts the amount of Annual Franchise Tax for Delaware corporations. Small- and medium-sized Delaware corporations may wish to consider either recapitalizing, and thereby reducing their number of authorized but unneeded shares, or else changing from a corporation to an LLC or an LP.

As well, Delaware corporations can be ‘continued’ into Wyoming. Your original incorporation date and EIN remain the same, as if you had set up in Wyoming in the first place. 

In terms of starting a new corporation, the states of Nevada and Wyoming will generally offer much lower annual franchise fees than will Delaware.

The Top 12 LLC Advantages and Disadvantages

When looking to start a business or protect investments you have several options in the type of entity you can form. As with anything, there are advantages and disadvantages to limited liability companies.

Advantages

  • It limits liability for managers and members.
  • Superior protection via the charging order.
  • Flexible management.
  • Flow-through taxation: profits are distributed to the members, who are taxed on profits at their personal tax level. This avoids double taxation.
  • Good privacy protection, especially in Wyoming.
  • This is a premier vehicle for holding appreciating assets, such as real estate, stock portfolios, and intellectual property.
  • Extraordinary flexibility in the ability to allocate profits and losses to members in varying amounts.

Disadvantages

LLCs and the Charging Order

One of the great asset protection advantages of the LLC is the charging order.

Charging order protection arises from each state’s law and is a key strategy for shielding your assets from attack. As with anything in the law, the charging order is subject to change and interpretation by the courts. Some states view the statute differently than others, which is why it is important to choose the right state when forming a limited partnership (LP) or limited liability company (LLC). It is also important to keep up on the new court cases and trends in this area to keep yourself better protected. Remember, the LLC has only been widely used in the USA in the last 25 years or so. We are just now starting to see court cases defining their scope and use.

Going back to the original statute (the rule passed by each state’s legislature) we consider section 703 of the Uniform Limited Partnership Act. It states that if a partner of an LP owes money to a judgement creditor (one who has gone to court and prevailed) the court may order a ‘charge’ against the partner’s interest to pay the judgement creditor. Thus the term ‘charging order’. This rule also applies to LLCs.

For example, if John owns a 50% membership interest in XYZ, LLC and John owes money to Mary after losing to her in court, Mary can seek a charging order to receive John’s 50% share in the distributions from XYZ, LLC. Of course, John’s other partner Carlos is not as keen to this, but any disruption is minimized with the charging order. Mary does not step into John’s shoes as a substituted partner. She can’t vote and tell Carlos how to run the business. Instead, she is only assigned the distributions that would have been made to John.

Again, the charging order is a court order providing a judgement creditor (someone who has already won in court and is now trying to collect) a lien on distributions. A chart helps to illustrate our example:

illustration of charging order

In our example, John was in a car wreck which injured Mary, the other driver. Mary does not have a claim against XYZ, LLC itself. The wreck had nothing to do with the duplex. Instead, Mary wants to collect against John’s main asset, which is a 50% interest in XYZ, LLC. Courts have said it is not fair to Carlos, the other 50% owner of XYZ, to let Mary come crashing into the LLC as a new partner. Instead, the courts give Mary a charging order, meaning if any distributions (think profits) flow from XYZ, LLC to John then Mary is charged with receiving them.

Mary is not a partner, can’t make decisions or demands and has to wait until John gets paid. If John never gets paid, neither does Mary. The charging order not only protects Mary, but it is a useful deterrent to frivolous litigation brought against John. Attorneys don’t like to wait around to get paid.

This short video also explains the charging order:

But what if there is only a single owner?

The Difficulties of Single Member LLCs

In a Single Member LLC, there is no Carlos to protect. It’s just John. Is it fair to Mary to only offer the charging order remedy? Or should other remedies be allowed?

llc advantages and disadvantages charging order single member llc

A key issue is whether the charging order applies to a single member (one owner) LLCs. There is a nationwide trend against protecting single member LLCs with the charging order. Courts are starting to deny single owner LLCs the same protection as multiple member LLCs. The reason has to do with the unique nature of the charging order.

In June of 2010, the Florida Supreme Court decided the Olmstead vs. FTC on these grounds. In a single owner LLC there are no other members to protect. The court allowed the FTC to seize Mr. Olmstead’s membership interests in order to collect. Other states have followed the trend.

How Corporate Structure Can Increase Protection

Say you have a property in Oregon. That property is entitled to an Oregon LLC, which is owned by a Wyoming LLC. You then invest in a property in North Carolina, so you set up a North Carolina LLC owned by the Wyoming LLC.

If a tenant of your Oregon property sues over something that happened on the property, they have a claim against the Oregon LLC, not against you personally. They can’t get at your North Carolina LLC, and they can’t get at equity held on your personal property.

As you can see it’s beneficial to spread your properties across multiple LLCs. If you have 10 properties all in one LLC, it becomes a target-rich LLC. Often, we recommend only having one property per LLC. You may wish to have two or three properties in an LLC, but it really depends on how much equity you have in each property. The structure of your business really comes in to play during an inside attack, which is where the lawsuit is against an LLC, not the owner.

In the case of an outside attack, where the owner of the LLC is the target of a lawsuit, the charging order comes into play. In our example above where Mary is trying to get at John’s property, let’s assume John is the owner of a Wyoming LLC, and he has LLCs in North Carolina and Oregon. The car wreck has nothing to do with John’s Wyoming LLC, the holding in Oregon or the holding in North Carolina, so Mary can only go after John. And since John has a Wyoming LLC, even if he is the sole owner of the Wyoming LLC, Mary’s only option is the charging order. If the Wyoming LLC makes no distributions, Mary gets nothing. If the Oregon LLC and the North Carolina LLC make no distributions to Wyoming, Mary gets nothing.

This is not a great situation for attorneys who are on a contingency fee. They get a percentage of what is collected and it’s not a really good way to operate if they have to sit around get a charging order against the Wyoming LLC and then sit around and wait to get paid. Attorneys, being rational, economic animals are going to take the next case that has insurance instead of waiting for John to pay Mary.

You want to use the strategic positioning of the Wyoming LLC, which will own all your other out-of-state LLCs. States like Oregon and North Carolina may not protect the single member LLC, so you really need a Wyoming entity for protection in a case like the car wreck example. The Wyoming LLC creates a firewall against attorneys and frivolous lawsuits.

Entity Structuring is Our Specialty!