Limited liability companies are highly sought after due to their asset protection benefits. Wyoming exceeded other states by intentionally crafting laws meant to further enhance the benefits of forming an LLC.
It is important to understand the laws in Wyoming are not loopholes. They were intentionally written to be taken advantage of. Wyoming was the first state to allow LLCs and continues leading the world to this day.
Generally, LLCs offer two forms of asset protection. The first is personal protection from business creditors, and the second is protecting business assets from personal creditors. The first form of asset protection is known as the corporate veil.
The business entity is considered its own person under the eyes of the law. It may enter contracts, open bank accounts and carry on after its owners die. This degree of separation from the owners is what provides asset protection. The liabilities of the LLC are solely those of the LLC. They do not pass through to the owners.
This means your company can go bankrupt without affecting your personal finances. The company’s creditors cannot sue or otherwise pursue the company’s owners. This feature is intentional and, in part, made modern business possible.
Other states provide judges ample opportunity to pierce the corporate veil. Common reasons for piercing the veil are fraud, criminal acts and using the LLC as an alter ego.
- If you commit fraud, then the corporate veil will not protect you, e.g. lying on a loan application or embezzling funds.
- If you drive drunk in a company car and have an accident, then both you and the company will likely be sued. The LLC will afford no protection.
- If the judge rules you never obeyed corporate formalities, then the LLC may be disregarded. E.g., not properly titling property or comingling funds. This is an increased risk for Single Member LLCs in states other than Wyoming.
Prior to the corporate veil, individuals were discouraged from starting businesses or otherwise taking risk. If a company failed, not only would the initial equity investment be at risk, but personal assets could be seized as well. This, along with debtor prisons, made doing business before the corporate veil a precarious endeavor.
Protection from Personal Creditors
Wyoming LLCs also offer superior protection from personal creditors. Other states make it easy for personal creditors to seize your membership interest. They may then vote, force asset sales and make distributions to themselves.
This means your LLC will not be protected from personal risks such as car accidents. Other states offer varying degrees of protection for multi-member LLCs, but none have specific protections for Single Member LLCs as Wyoming does.
Wyoming provides charging order protection for all LLCs. This means creditors cannot obtain an order allowing them to seize control of the company. They may only seize distributions IF they occur. If a charging order is secured, then you may keep your funds inside the company. This allows you to continue growing the company.
It also provides a powerful bargaining chip. Since a creditor cannot easily access funds inside the LLC they are more likely to settle. It becomes a waiting game with you holding all of the money.
If properly structured, you may make payments to other LLCs you own through either debt repayments or service contracts, for example. Through preferential payments you reduce the funds available to creditors.
These protections provide a strong deterrent to lawsuits in the beginning. Creditors know they do not have an easy path to securing a judgement and attaching it to assets. This often deters all but the most determined of creditors.
One issue not covered above is protecting business assets from business liabilities. It would be nice if insurance operated as a catch all, but it does not. Insurance may be inadequate, lapse or the insurance company may simply refuse to pay.
Setting up a holding company and subsidiaries enhances the above protections. A holding company and its subsidiaries can be thought of as a “Double LLC”. This means there are two layers of protection from personal and business creditors.
An accident with an operating company would have to pierce both the operating LLC’s veil and the holding company’s before reaching you. This is exceedingly unless there has been fraud.
The charging order protection is also amplified through a holding company. The operating subsidiaries will be unaffected and may continue to transfer funds between themselves and invest as needed.
While Wyoming LLCs offer excellent asset protection, they do have shortcomings. Insurance also cannot be expected to cover everything. Those with significant assets, or in risky industries, should consider establishing an an asset protection trust or a 401k. These vehicles provide additional asset protection, including from the government, while offering tax benefits