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Limited Partnerships – Advantages and Case Study

Advantages of Limited Partnerships

  • LPs allow for pass-through taxation for both the limited partner and the general partner.
  • Limited partners are not held personally responsible for the debts and liabilities of the business, although the GP, if an individual, may be personally responsible.
  • The general partner(s) have full control over all business decisions, which can be useful in family situations where ownership – but not control – has been gifted to children.
  • Estate planning strategies can be achieved with LPs.
  • Limited partners are not responsible for the partnership’s debts beyond the amount of their capital contribution or contribution obligation. So, unless they become actively involved, the limited partners are protected.
  • As a general rule, general partners are personally liable for all partnership debts. But as was mentioned above, there is a way to protect the general partner of a limited partnership. To reduce liability exposure, corporations or LLCs are formed to serve as general partners of the limited partnership. In this way, the liability of the general partner is encapsulated in a limited liability entity.
  • Because by definition limited partners may not participate in management, the general partner maintains complete control. In many cases, the general partner will hold only 2% of the partnership interest but will be able to assert 100% control over the partnership. This feature is valuable in estate planning situations where a parent is gifting or has gifted limited partnership interests to his children. Until such family members are old enough or trusted enough to act responsibly, the senior family members may continue to manage the LP even though only a very small general partnership interest is retained.
  • The ability to restrict the transfer of limited or general partnership interests to outside persons is a valuable feature of the limited partnership. Through a written limited partnership agreement, rights of first refusal, prohibited transfers, and conditions to permitted transfers are instituted to restrict the free transferability of partnership interests. It should be noted that LLCs can also afford beneficial restrictions on transfer. These restrictions are crucial for achieving the creditor protection and estate and gift tax advantages afforded by limited partnerships.
  • Creditors of a partnership can only reach the partnership assets and the assets of the general partner, which is limited by using a corporate general partner which does not hold a lot of assets.
  • The limited partnership provides a great deal of flexibility. A written partnership agreement can be drafted to tailor the business and family planning requirements of any situation. And there are very few statutory requirements that cannot be changed or eliminated through a well-drafted partnership agreement.
  • Limited partnerships, like general partnerships, are flow-through tax entities.

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Case Study:

When a Limited Partnership is Best

Jim is the proud father of three boys. Aaron, Bob, and Chris are active, athletic, and creative boys almost ready to embark upon their own careers. The problem was that they were sometimes too active, too athletic, and too creative.

At the time Jim came to see me, Aaron was seventeen years old and every one of the seemingly unlimited hormones he had was shouting for attention. He loved the girls, the girls loved him, and his social life was frenetic and chaotic.

Bob was sixteen years old and sports were all that mattered. He played sports, watched sports, and lived and breathed sports.

Chris was fifteen years old and the lead guitarist in a heavy metal band. When they practiced in Jim’s garage the neighbors did not confuse them with the Beatles.

Jim has five valuable real estate holdings that he wants to go to the boys. His wife had passed on several years before and he needed to make some estate planning decisions. But given the boys’ energy level and lack of direction he did not want them controlling or managing the real estate.

Jim knew that if he left the assets in his own name, when he died the IRS would take 55% of his estate, which was valued at over $10 million. And while estate taxes were supposed to be gradually eliminated, Jim knew that Congress played politics in this arena and no certainty was guaranteed. Jim had worked too hard, and had paid income taxes once already before buying the properties, to let the IRS’s estate taxes take away half his assets. But again, he could not let his boys have any sort of control over the assets. While the government could squander 55% of his assets, he knew that his boys could easily top that with a 100% effort.

I suggested that Jim place the five real estate holdings into five separate limited partnerships.

I further explained to Jim that the beauty of a limited partnership was that all management control was in the hands of the general partner. The limited partners were not allowed to get involved in the business. Their activity was “limited” to being passive owners.

It was explained that the general partner can own as little as 2% of the limited partnership, with the limited partners owning the other 98% of it, and yet the general partner can have 100% control in how the entity was managed. The limited partners, even though they own 98%, cannot be involved. This was a major and unique difference between the limited partnership and the limited liability company or a corporation. If the boys owned 98% of an LLC or a corporation they could vote out their dad, sell the assets, and have a party for the ages. Not so with a limited partnership.

The limited partnership was perfect for Jim. He could not imagine his boys performing any sort of responsible management. At least not then. And at the same time he wanted to get the assets out of his name so he would not pay a huge estate tax. The limited partnership was the best entity for this. The IRS allows discounts when you use a limited partnership for gifting. So instead of annually gifting $14,000 tax free to each boy he could gift $16,000 or more to each boy. Over a period of years, his limited partnership interest in each of the limited partnerships would be reduced and the boys’ interest would be increased. When Jim passes on, his estate tax will be based only on the amount of interest he had left in each limited partnership. If he lives long enough he can gift away his entire interest in all five limited partnerships.

Except for his general partnership interest. By retaining his 2% general partnership interest, Jim can control the entities until the day he dies. While he is hopeful his boys will straighten out, the limited partnership format allows him total control in the event that does not happen.

Jim also liked my advice that each of the five properties be put into five separate limited partnerships. I explained to him that the strategy today is to segregate assets. If someone gets injured at one property and sues, it is better to only have one property exposed. If all five properties were in the same limited partnership, the person suing could go after all five properties to satisfy his claim. By segregating assets into separate entities the person suing can only go after the one property where they were injured.

Jim liked the control and protections afforded by the limited partnership entity and proceeded to form five of them.

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IRS Liens Don’t Die

Beware of Purchasing Real Estate with Unpaid Liens on It

Can the Internal Revenue Service (“IRS”) collect a prior owner’s delinquent federal income taxes from the subsequent purchaser of real property?


In Shirehampton Drive Trust v. JP Morgan Chase Bank, N.A., 2019 WL 4773799 (D.Nev., Sept. 29, 2019) (unpublished decision) (Case No. 2:16-cv-02276-RFB-EJY), the United States District Court for the District of Nevada concluded that the IRS was entitled to enforce its federal income tax liens against the new owner of real property.

The Course of Proceedings in Shirehampton

Plaintiff Shirehampton Drive Trust (“Shirehampton”) sued Defendant, United States of America Treasury Department, Internal Revenue Service (“IRS”), and Defendant, JP Morgan Chase Bank, N.A. (“Chase”), seeking a declaration that from the Court that a Las Vegas property that it had obtained at a foreclosure sale in 2013 was not encumbered by Chase’s deed of trust.  To that end, Shirehampton asserted claims for injunctive relief, quiet title, and declaratory relief.  The IRS removed the case to federal court, and answered and counterclaimed against Shirehampton, and crossclaimed against Chase and other Defendants, to enforce federal tax liens pursuant to 26 U.S.C. §§ 6321, 6322 and 7401.  Chase answered the complaint and asserted counterclaims for quiet title under NRS 40.010, declaratory relief under NRS 30.010 and 28 U.S.C. § 2201, and unjust enrichment.  Shirehampton answered the counterclaims, and the Court dismissed the other Defendants without prejudice.  All three remaining parties then moved for summary judgment.  The Court administratively stayed the case pending the Nevada Supreme Court’s decision in SFR Investments Pool 1, LLC v. Bank of New York Mellon, 134 Nev. 438, 422 P.3d 1248 (2018), but then lifted the stay.

The Facts in Shirehampton

This matter concerned a nonjudicial foreclosure on a property located at 705 Shirehampton Drive, Las Vegas, Nevada 89178 (the “property”).  The property was located in a community governed by a homeowners’ association (“HOA”) that required its community members to pay dues.

Louisa Oakenell (“Oakenell”) borrowed funds from MetLife Home Loans, a Division of MetLife Bank, N.A. (“MetLife”) to purchase the property in 2008.  To obtain the loan, Oakenell executed a promissory note and a corresponding deed of trust to secure repayment of the note.  The deed of trust listed Oakenell as the borrower, MetLife as the lender, and Mortgage Electronic Registration Systems, Inc. (“MERS”), as the beneficiary.  In May, 2013, MERS assigned the deed of trust to Chase.

Oakenell fell behind on her HOA payments.  The HOA, through its agent Red Rock Financial Services, LLC (“Red Rock”), sent Oakenell a demand letter by certified mail for the collection of unpaid assessments on June 26, 2009.  On July 21, 2009, the HOA, through its agent, recorded a notice of delinquent assessment lien.  The HOA sent Oakenell a copy of the notice of delinquent assessment lien on July 24, 2009.  The HOA subsequently recorded a notice of default and election to sell on October 21, 2009, and then a notice of foreclosure sale on September 18, 2012.  Red Rock mailed copies of the notice of default and election to sell to Oakenell, the HOA, the IRS, and Metlife Home Loans.  Red Rock did not mail a copy of the notice of default and election to sell to MERS.  On January 28, 2013, the HOA held a foreclosure sale on the property under NRS Chapter 116.  Shirehampton purchased the property at the foreclosure sale, and a foreclosure deed in favor of Shirehampton was recorded.

In addition to falling behind on her HOA payments, Oakenell also stopped paying federal income taxes.  The IRS subsequently filed notices of federal tax liens against Oakenell at the Clark County Recorder’s office on May 1, 2009, and June 24, 2009.  As of October 1, 2018, Oakenell had accrued $250,953.37 in income tax liability plus daily compounding interest.

The Decision in Shirehampton

The Court concluded that the IRS was entitled to enforce its federal income tax liens against Shirehampton, the new owner of real property, but that Shirehampton acquired the property free and clear of Chase’s deed of trust.

The Rationale of Shirehampton

Chase Deed of Trust.

The Court first addressed whether Shirehampton purchased the property subject to Chase’s deed of trust, and concluded that it did not.

Chase argued that the foreclosure sale was void because the HOA, through its agent, did not comply with the notice requirements of the version of NRS 107.090 in effect at the time by serving a copy of the notice of default and notice of sale on MERS, its predecessor-in-interest.  See, NRS 107.090(3)(b) (requiring that any person recording a notice of default mail a copy of the notice within ten days of recording to “[e]ach other person with an interest whose interest or claimed interest is subordinate to the deed of trust.”). The Court disagreed, and found the facts to be substantially similar to the Nevada Supreme Court’s decision in West Sunset 2050 Trust v. Nationstar Mortgage, LLC, 134 Nev. 352, 354-55, 420 P.3d 1032 (2018) (concluding that “Nationstar’s failure to allege prejudice resulting from defective notice dooms its claim that the defective notice invalidates the HOA sale”).

The Court next considered Chase’s argument that the HOA did not intend to foreclose on the superpriority portion of the lien, because the assessment lien notices did not specify that the sale was a superpriority sale.  The Court disagreed, and distinguished the Shirehampton case from the recent decision of the Nevada Supreme Court’s in Cogburn Street Trust v. U.S. Bank, N.A., as Trustee to Wachovia Bank, N.A., 2019 WL 2339538 (decided May 31, 2019) (concluding that HOA properly nonjudicially foreclosed on subpriority portion of lien after bank’s tender satisfied superpriority portion of the lien).  The Court concluded that Chase’s evidence was insufficient to find that the HOA intended to foreclose on the subpriority portion of the lien as a matter of law, and did not establish fraud, oppression, or unfairness sufficient to void the sale.  In addition, the Court noted that it had previously addressed Chase’s further argument regarding the facial unconstitutionality of NRS Chapter 116, and thus incorporated by reference its reasoning in Carrington Mortgage Services, LLC v. Tapestry at Town Center Homeowners Association, 381 F. Supp. 3d 1289, 1294 (D.Nev. 2019).  Thus, the Court finds that Chase’s deed of trust was extinguished by the HOA foreclosure sale.

IRS Tax Lien.

The Court next addressed the priority of the IRS tax lien versus that of the HOA’s lien, and concluded that, because the HOA lien was not perfected at the time that the IRS recorded its notice of tax liens, the IRS tax liens had priority over the HOA lien

The Court initially noted that, when the IRS assesses a person for unpaid federal taxes, a lien is created in favor of the United States as a matter of law, citing, 26 U.S.C. § 6321.  While the lien is automatically created when the assessment occurs, the lien is not valid against purchasers, holders of security interests, mechanic’s liens, or judgment lien creditors until notice of it has been filed, citing, 26 U.S.C. § 6323(a).  Federal tax liens do not automatically have priority over all other liens.  Absent a provision to the contrary, priority for purposes of federal law is governed by the common-law principle that the “the first in time is in the first in right”; and a competing state lien exists for “first in time” purposes when it has been perfected, meaning that the identity of the lienor, the property subject to the lien, and the amount of the lien are established, citing, U.S. v. McDermott, 507 U.S. 447, 449, 113 S.Ct. 1526, 123 L.Ed.2d 128 (1993).

Applying these principles to the Shirehampton case, the Court observed that the IRS first assessed Oakenell for lack of income tax payments on November 7, 2005, and July 3, 2006; and that the IRS then recorded its notice of tax liens with the Clark County recorder on May 1, 2009, and June 24, 2009.  The Court further observed that Oakenell first became delinquent on her HOA dues on March 1, 2009; that the HOA recorded its notice of delinquent assessment lien on July 21, 2009; and that the HOA mailed Oakenell a copy of the notice of delinquent assessment lien on July 24, 2009.

Despite these facts, Shirehampton argued that the HOA lien was first in time.  Shirehampton claimed that, because the notice of delinquent assessment recorded in July, 2009, incorporated delinquent assessments that had been owed since January, 2009, it was technically first in time.  Shirehampton pointed to the language of NRS 116.3116 at the time, which stated that the “association has a lien…from the time the…assessment or fine becomes due.”  Oakenell did not become delinquent until March 1, 2009, so Shirehampton argued that the HOA lien was perfected on March 1, 2009.  The Court disagreed, and found that the HOA lien was not perfected until the notice of delinquent assessment lien was sent to the unit owner, citing, In re Priest, 712 F.2d 1326, 1329 (9th Cir. 1983) (“[A] lien cannot arise prior to the taking of any administrative steps to establish the lien.”).  The Court emphasized that the Nevada Supreme Court has held that the mailing of the notice of delinquent assessment lien to the delinquent homeowner pursuant to NRS 116.31162(1)(a) “institutes proceedings to enforce the lien,” quoting, Saticoy Bay LLC Series 2021 Gray Eagle Way v. JPMorgan Chase Bank, N.A., 388 P.3d 226, 231 (2017) (“A party has instituted ‘proceedings to enforce the lien’ for purposes of NRS 116.3116(6) when it provides the notice of delinquent assessment.”).  Thus, the Court stressed that providing notice of delinquent assessment is the first administrative step to perfecting a superpriority lien, because “no action can be taken unless and until the HOA provides a notice of delinquent assessments pursuant to NRS 116.31162(1)(a),” quoting, Saticoy Bay LLC Series 2021, supra, 388 P.3d at 231.  The Court pointed out that the notice of delinquent assessment also establishes, pursuant to NRS 116.31162(1)(a), the amount of the lien as is required under federal law before a lien can be perfected, citing, Loanstar Mortgagee Services, LLC v. Barker, 282 Fed.Appx. 572, 573 (9th Cir. 2008).  While assessments and related fees may be delinquent prior to this mailing, they are not set until the mailing, citing, NRS 116.31162(1)(a) (explaining that notice must contain a set “amount” for the delinquency).  The Court reasoned that the mailing of the notice of delinquent assessment was the first administrative step to establish a superpriority lien, and was the first time that the amount of this lien was fixed and set.  Thus, the Court found that an HOA lien cannot be perfected under federal law until at least the notice of delinquent assessment lien has been provided to the unit owner.  The Court stated that, it is only with this notice that the identity of the lienor, property subject to the lien, and, most significantly, the amount of the lien are sufficiently established.

Applying these principles to the Shirehampton case, the Court observed that Red Rock sent the notice of delinquent assessment lien pursuant to NRS 116.31162(1)(a) to Oakenell on July 24, 2009, which was after the IRS recorded its notice of tax liens.  As such, the Court concluded that, because the HOA lien was not perfected at the time that the IRS recorded its notice of tax liens, the IRS tax liens had priority over the HOA lien, citing, LN Management LLC Series 31 Rue Mediterra v. United States Internal Revenue Service, 729 Fed.Appx. 588 (9th Cir. 2018) (finding no record evidence that identity of HOA lienors, property subject to lien, and amount of lien were established before notice of federal tax lien was recorded).  The Court concluded that was IRS was entitled to enforce its tax liens against the new owner of the property, citing, U.S .v. Bess, 357 U.S. 51, 57, 78 S.Ct. 105, 42 L.Ed.2d 1135 (1958) (noting that “[t]he transfer of property subsequent to the attachment of [a federal tax lien] does not affect the lien”).

Thus, the Court held that the IRS could enforce its tax liens against Shirehampton, but that Shirehampton acquired the property free and clear of Chase’s deed of trust.


            This case is fairly straightforward; however, it does illustrate the potential difficulties that may ensue from purchasing real property at a foreclosure sale.  Obviously, a purchaser of real property at a foreclosure sale must be careful in doing so, because the IRS potentially can collect the prior owner’s federal income taxes from the subsequent purchaser of the real property. 

            It should be noted that Shirehampton filed a Notice of Appeal to the Ninth Circuit on November 5, 2019.


Under some circumstances, the IRS can collect a prior owner’s delinquent federal income taxes from the subsequent purchaser of real property.

10 Rules for Asset Protection Planning

Asset protection planning defends your assets from future creditors, divorce, lawsuits or judgments. How can you best plan to protect your personal and business assets? Here are some guidelines to implement strong asset protection.

  1. Plan Your Asset Protection Strategy BEFORE You’re Sued
    Once a lawsuit has arrived, it’s too late to put protections in place and there is little you can do. Take action before a claim or liability arises. In fact, a strong asset protection structure can discourage lawsuits because the better protected your assets are, the stronger a deterrent it is.
  2. Keep Your Personal and Business Assets Separate
    If you don’t insulate your own assets from those of your business, you could be in trouble. If you operate your business in the form of a sole proprietorship or as a general partnership, these businesses are not registered entities, which means that your personal assets are not insulated from those of your business.
  3. It’s Risky to Be A Sole Proprietor
    As an example, if you’re a sole proprietor and an angry customer sues you, any assets you own such as your house or car are not protected. Nor are financial assets such as your bank account. These can all be taken should a judgment be found against you.
  4. A Two-Man Partnership is Double the Risk
    Maybe you have thought about forming two-man partnership with your friend. This may perhaps be an even worse idea than operating as a sole proprietorship. What this means is that you are as liable for your friend’s errors as you are for your own. You are also liable for anything purchased in the name of your partnership. Remember that one partner’s signature is enough to bind both partners to a debt or other type of obligation. Again, this leaves you unprotected and without any recourse should something happen; you could be left holding the bag.
  5. Use a Registered Corporate Entity for Asset Protection
    To protect yourself, use a registered corporate entity. Most people don’t realize there’s a risk in keeping assets and property in your name, which also means keeping the liability and the risk. To succeed in business, to protect your assets and to limit your liability, you want to select from one of the good entities / structures that are truly separate legal beings. They are:
    • C Corporations
    • S Corporations
    • Limited Liability Companies (LLCs)
    • Limited Partnerships (LPs)

    Each one has it’s own advantages and specific uses. Each one is utilized by the rich and knowledgeable in their business and personal financial affairs. And, depending on your state’s fees, each one can be formed for $800 or less so that you can achieve the same benefits and protections that sophisticated business people have enjoyed for centuries.

  6. Meet Annual Requirements so That Legal Protection Remains Intact
    You’ll need to keep your company’s registration up-to-date, hold annual meetings and keep annual minutes, keep business funds separate from your own, and avoid signing any business-related documentation in your name. This is known as maintaining the corporate veil and we provide this service to many of our clients. This keeps your own assets separate from those of your business. By the same token, you are also protected from any debts or disasters incurred by your business.
  7. Protect Your Business Assets in a Business Entity
    You need to protect your business and real estate assets from yourself. A limited liability company is an excellent way to help protect key assets. (Learn how to become incorporated now.) For example, if you have a rental property, you should hold assets either in a limited partnership or in an LLC. These protect you from personal liability if anything should happen on the property and it also provides you another advantage. Should someone become injured on your property, you are protected from being sued directly by the tenant. Remember that the business’s assets are still at risk of suit should the tenant decide to sue. However, if you have adequate insurance, you can help protect yourself from having the claimant lay claim to your assets so as to satisfy your obligation. This strategy comes with a caveat though.
  8. Ensure You Have a Comprehensive Commercial Insurance Policy
    A comprehensive commercial insurance policy can help you keep the property instead of having it end up as a part of a court-ordered settlement. What should you look for?
    • The liability insurance should cover injuries to third parties on your property.
    • It should cover trespassing, especially if you have undeveloped or vacant land.
    • If you have people working on your property as your employees, you should also have Worker’s Compensation insurance.
    • The insurance should also have “increased cost of construction” additions if your building should become damaged or require reconstruction. That means you’ll be covered at today’s construction prices instead of those of previous years.
    • If you are a landlord, “loss of rents” riders can help you recover costs in the event your building is damaged and uninhabitable so that you can pay relocation costs or receive income from the property while it’s being rebuilt to offset right losses.
    • A final consideration is a “higher limits” rider, so that you have extra protection in the event a catastrophic claim is filed in one of these categories.
  9. Use Entities as a Second Line of Defense
    It is extremely important to carry adequate and proper insurance coverage, but as we know, insurance companies have an economic incentive to avoid covering all claims. They find reasons to deny coverage. So while you will have insurance you will use entities as a second line of defense to protect your personal assets from your business claims.
  10. Avoid Incorporation Scams
    You need to know that there are a number of other corporate information scams in the marketplace. A popular one is the $99 incorporation. For just $99, they claim you will be bulletproofed and asset-protected. “C’mon down. We’ll set you right up”, they say.

    We have tested such services to see how they could possibly do all the work necessary to completely and properly form and document a corporation or LLC for just $99. These providers fall into two camps.

    1. The first camp does the minimal work needed to form an entity. They file the articles. That’s it. Once you pay the $99 they will no longer take your phone calls or questions. Eventually you will be sent a document with a state seal on it indicating that you are incorporated. But you will not be sent the minutes, the bylaws, or any issued stock – all of the other components necessary to be a complete corporation. Of course, if you hadn’t read this article, you would probably think in your blissful ignorance that for just $99 you were protected. You are not.
    2. The second camp uses the $99 as a come-on. They offer an a la carte menu in which the $99 is just for the filing of the articles. The bylaws are another $350. The meeting minutes are $250, and so on. By the time you are done they have gained your confidence and that $99 has ballooned up to $2,000 to $3,000 for just one entity.

9 Rules to Consider Before Signing an Arbitration Provision

By Theodore Sutton

Binding arbitration is becoming a popular method to resolve disputes in real estate transactions. Arbitration provides certain advantages that courts do not. For instance, arbitrations are private, they resolve disputes in a more timely and efficient manner, and they obviously provide a much cheaper alternative to a full-on court trial. While arbitrations provide all these benefits, parties entering a contract must pay special attention to the language written in arbitration clauses. Many undesirable consequences can arise if the language in these clauses is vague and unsatisfactory, such as having unenforceable provisions or prohibiting the use of discovery. While laws differ from state to state (and be sure to consult your own attorney) below are some general issues to be considered before an arbitration provision is signed:

1. Transaction Documentation – The arbitration provisions are required to be included as an alternate dispute resolution matter within the transaction documentation. These provisions should be more general in order to encompass different types of disputes, such as tort and contract disputes. Stand-alone arbitration agreements are more definitive, and may be useful to also be included within the documents related to your specific transaction.

2. Arbitration Commencement – A provision acknowledging that both parties are voluntarily agreeing to an arbitration must be included in the contract. It is also imperative that this provision states that:

  • The parties are knowingly and voluntarily waiving their right to a jury or court trial.
  • Any uncooperative party be compelled to arbitrate through a court order.
  • The arbitration is binding and may not be appealed. (Know that some states don’t provide for exceptions).

3. Arbitrator Selection – These selection provisions must be clearly established so both parties will have a say in selecting the arbitrator, the person deciding your case. This is important because it allows both parties to select either an experienced retired judge or appellate justice, a private attorney or a licensed arbitrator.

4. Rules of Evidence – In some states, arbitrators are allowed to be “arbitrary.” The easiest way to avoid this is to include an arbitration provision that requires the arbitrator to follow to the rules of evidence in legal proceedings.

5. Discovery – Discovery rights (the right to discover the other side’s evidence) must be specified. Otherwise the arbitrator is not required to permit discovery. Specific dates and times must be provided in order for the discovery to be conducted.

6. Court Reporter – Court reporter costs are frequently ignored. One way to prevent this is to share the cost in the contract to avoid disputed fees.

7. Initials – Arbitration provisions must be initialed by both parties within the contract in order for them to be enforceable.

8. Exceptions – Exceptions from arbitration may be included in arbitration provisions. Some common exceptions are foreclosure proceedings, unlawful detainer actions, and injunctive reliefs.

9. Judgment Entry – In some states, it is required to authorize the arbitrator to enter their award as a court judgment.   Arbitration can save your time and money. But as with any legal matter, you want to do it right. This starts with a good contract. Be sure to consult your attorney on arbitration issues. As mentioned, the rules vary from state to state.

Theodore Sutton is a graduate of the University of Utah and will attend the University of Wyoming Law School in the Fall of 2019.

Five Steps for Real Estate Asset Protection

When purchasing real estate, it’s critical to protect ourselves and our possessions from lawsuits. We live in the most sue-happy society, in one of the most litigious times, and you need to protect yourself. One way to help prevent people from obtaining all your assets is to take precautions and think ahead, in order to ensure all your life treasures are secure. When a lawsuit is filed against you or your business, all your personal assets like you car, house, equity in your house, and bank accounts are at risk to be taken away. Here are a few ways to help ensure your real estate and personal possessions will be protected and secure.

1. Set Up Your LLC to Hold Your Real Estate

Let’s imagine you are purchasing 4-plex for an investment and will be renting it out for profit. When setting up your entity, make sure it is structured properly to hold the title of the real estate. An excellent entity for real estate is a Limited Liability Company (LLC). When you set up your LLC be sure that is it holding the title of your 4-plex. This structure also helps protect all your personal assets. For example, if a tenant of that 4-plex sues for falling on the property and wins the court case, they are not able to acquire all your personal assets like your bank account, the equity in your home, and all your other assets because the 4-plex is owned by the LLC. They are only able to access the assets in the LLC.

However, if you personally owned the 4-plex and did not set up an LLC to keep your assets separate, you could be vulnerable to unlimited personal liability, and you could be personally responsible for paying back whatever the court awards to the tenant for compensation. For some, that could mean bankruptcy. This is why it’s valuable to set up LLCs for protection.

2. Properly Maintain Your LLC

In order for your LLC to protect you from claims, you must maintain it much like taking care of a garden. Taking care of your garden by watering and feeding it properly is the best way for it to survive and keep it producing food for you. In order for your LLC to survive and keep protecting you, you must pay the annual fee to the state, ensure that minutes are being kept at meetings, and there needs to be a resident agent to accept service of process, or notice of a lawsuit. If you do not follow these easy steps, your business entity will lose its good standing, it will not be able to protect you as you could be vulnerable to piercing the corporate veil, and all your business and personal assets could be taken if a legal decision is decided against you. However, if you follow these steps you will be properly protected.

3. Segregate Your Assets

When creating your LLC, it is important to keep in mind that people are still capable of obtaining all your assets within that LLC. So why put all eggs in one basket? Instead separate your assets into different LLCs to act as a safety net, and ensure they aren’t able to obtain all of your real estate investments or company assets.

4. Get a Wyoming LLC to Hold Your Other LLCs

Certain states have different regulations on LLCs that can offer more protection, so why not take advantage of that? Wyoming is special in that it has great asset protection, great charging order protection, and it doesn’t list your name on the internet. Wyoming LLCs can own other LLCs established in other states. Not only does it have these great benefits, but it also has one of the most affordable state fees. Corporate Direct has also identified a way to ensure that the more preferable protections of Wyoming’s state laws take precedence over other state laws. This is a service we offer through our copyrighted legal language that is not available from any other company or law firm. We call it Armor8® . Learn more about our ultimate Wyoming LLC protection.

5. Use Equity Stripping

Another method of protecting assets is ‘equity stripping,’ sometimes called equity transfer.  With equity stripping you protect your equity by encumbering the property itself. Debt is a form of asset protection. The more debt, the less equity, the lesser chance of litigation. Since debt is asset protection, why not create the debt yourself? This can be done several ways such as spousal transfers, using your property as collateral, obtaining a secured line of credit, and a technique called cross-collateralization. Cross-collateralization is a term used when the collateral for one loan is also used as collateral for another loan. If a person has borrowed from the same bank a home loan secured by the house, a car loan secured by the car, and so on, these assets can be used as cross-collaterals for all the loans.

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.


  • 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.


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.

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