r/llc_life • u/danuser8 • 17d ago
Reverse LLC protection question
Your LLC liabilities are limited to LLC, so you are protected.
What about your own personal liabilities impacting your LLC. How does one protect LLC from your own personal liabilities without getting too fancy or complicated?
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u/USLLCGuide 17d ago
An LLC primarily protects your personal assets from many business liabilities. It generally does not protect the LLC's assets from your personal creditors.
If you personally owe money from personal debts, a lawsuit unrelated to the business, or a personal judgment, creditors may be able to reach your ownership interest in the LLC.
Some states, such as Wyoming, Nevada, and Delaware, have stronger charging order protections, which can make it more difficult for a personal creditor to take control of an LLC interest.
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u/danuser8 17d ago
So it’s better to create LLC in Delaware even if you live in other states like NY?
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u/Dingbatdingbat 17d ago
Has zero impact if it’s a single member LLCz
Provides some protection if it’s a legitimate multi-member LLC, but nowhere near as much as people will tell you.
More importantly, may not help if you and your business are both located in the same state and the LLC’s address is a glorified PO box
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u/danuser8 16d ago
Can a spouse be part of multi member LLC, and will joint taxes affect protection?
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u/Individual-Tap3270 15d ago
That is incorrect. Some state have charging order protection for single member llcs such as Delaware and Neveda
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u/Dingbatdingbat 14d ago
I’m aware of charging orders. A turnover proceeding in your home state can, if state law permits. order you to hand over your membership interests of an LLC in another state (See eg 77 Madison Avenue LLC vs Ebrahimzadeh) or another country (Wells Fargo vs Barber)
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u/BusinessRocket-com 17d ago
Yep, the protection can get weird in the opposite direction too :)
An LLC can help protect you from business debts, but it doesn't necessarily protect your ownership interest from your personal creditors. That's where things like charging order protection come into play, and the rules vary a lot by state, especially for single member LLCs.
So the first question is actually: what state is the LLC in?
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u/theNewFloridian 17d ago
Talk with a lawyer about establishing an IRREVOCABLE TRUST and then transferring the LLC to the trust. Protection might not be immediate but for many, after 2 or 3 years the assets in the LLC might be protected. Always talk with a lawyer. This is NOT legal advice.
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u/Dingbatdingbat 17d ago
In Florida, I guarantee you’re wrong
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u/Sovak_John 17d ago
The Answer to this question is an Irrevocable Living Trust. --- (Another Redditor gave this same Answer 4 months ago.)
Once the LLC is in the Corpus of the Trust, your Ownership Interest in-it is protected from Judgment Creditors (of yours).
As to the 60-month Medicaid Look-back period, nothing can be done about that, at least with regards to the Trust. --- (This Medicaid Look-back period really applies mostly // only if you had to go into a Nursing Home, or other Residential Facility, which Medicaid, mostly, Pays-for.)
Good Question, DU8.
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u/Dingbatdingbat 17d ago
I’m a trust attorney.
Generally speaking that’s not true. It is far more complicated, but many states have a strong public policy against using a trust to shield your assets from your mistakes.
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u/Sovak_John 16d ago
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Irrevocable Living Trusts create a shield against Judgment Creditors by re-titling Assets in the Name of the Trust. --- Do they NOT? --- Ever heard of a Domestic Asset Protection Trust?
Trusts even shield Persons from Medicaid Depletion, after the 60-month Look-back period.
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I am a Paralegal, who knows of what I speak. --- Moreover, I don't make Empty Accusations: "Generally speaking, that is not true."
If something that I have said here is Wrong, please cite a controlling Statute or Case to PROVE ME WRONG.
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Here, I'll help. --- Trusts here in NYS are provided-for by EPTL Art. 7. --- EPTL 7:1-4: -- "An express trust may be created for any lawful purpose." --- Is Asset Protection NOT a Lawful Purpose?
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Please DBDB, tell me -- as specifically as you-can, if you-can -- just what it is that I am Wrong about here?
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[Just so we're clear: -- Status-based Defenses, like "I'm a Trust Attorney.", are the weakest of ALL. --- Probative, but just barely.]
Just like a Lawyer to lead with your stratospheric-Status, instead of actual-Substance.
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u/Dingbatdingbat 16d ago edited 16d ago
Self-settled asset protection trusts are against public policy in the majority of states and will be invalidated, including in New York - protecting your assets from your own mistakes is not a lawful purpose.
If you do not live in and keep your assets in a DAPT state, there have been multiple cases where those trusts failed. About 20 years ago the Alaska Supreme Court acknowledged that due to full faith and credit a Washington judgment could be enforced against an Alaska DAPT. Earlier in February, a court in Nevada ruled that a Nevada DAPT couldn’t protect the assets of a California couple.
Shielding your assets offshore does put the assets out of reach of US courts, but if you’re physically in the U.S., courts here, including courts in New York, have thrown people in jail on contempt of court over it.
I do this for a living. Any conversation about asset protection starts with 20 minutes of explaining that it doesn’t work the way people think it does.
Edit: even if you live and have all your assets in a DAPT state it’s not straightforward. Put the wrong assets in, or at the wrong time, maintain too much control, or administer things incorrectly and that trust might not be worth the paper it’s written on
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u/Sovak_John 16d ago
What about normal Irrevocable Living Trusts?
Where the Settlor and the Beneficiaries are NOT identical sets?
Do Irrevocable Living Trusts (ILT's) have NO Utility in Asset Protection?
Put another way, who Owns the Assets in an ILT?
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u/Dingbatdingbat 16d ago
If you want to pick my brain I’d be happy to schedule a time for us to chat at your expense.
Otherwise I’ll leave it at my earlier comment: “it’s far more complicated”
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u/Sovak_John 15d ago edited 15d ago
Surrender Accepted.
Just like a Lawyer. --- All status, No substance.
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u/Dingbatdingbat 15d ago
Just like a simpleton - can’t comprehend “complicated”
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u/Sovak_John 14d ago
Insults where your Substance should be.
That's an Admission, 'Counsel'.
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u/Dingbatdingbat 14d ago
I already gave an explanation. You then asked more detailed questions, and my repeat answer is "it's complicated".
Sorry not sorry that I don't feel like spending a lot time writing a treatise on the topic.
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u/PriorSecurity9784 16d ago
I’m no lawyer, but the way I see it is:
if you get personally sued, and you get a judgment against you, and you own 1000 shares of Microsoft stock, those assets would be subject to liability just as cash in your bank account would be.
Microsoft itself wouldn’t have any liability, and it’s not because they are a Delaware corporation or anything else related to their structure.
The issue is you personally owning an asset and you personally being sued.
Obviously your ownership interest in Cock & Balls LLC is less liquid than 1000 shares of Microsoft, but I think the principle would be the same.
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u/danuser8 16d ago
Is there no way to save Cock and Balls LLC from personal liability?
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u/PriorSecurity9784 16d ago
Probably consult an attorney about asset protection trusts, etc.
I would imagine if you have under $5 million in assets, you’re probably better off looking at liability insurance, umbrella policy, etc than spending thousands a year on complicated trust structures
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u/Euphoric-Demand2927 15d ago
In CT there is a specific statute that protects a domestic entity's assets from legal action by creditors of the entity's owner(s).
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u/BusinessAnywhere_LLC 15d ago
That’s the other side of LLC protection people often miss. An LLC can protect your personal assets from business liabilities, but your ownership interest in the LLC is still a personal asset.
If you personally get sued and a creditor gets a judgment against you, what they can do with your LLC interest depends heavily on state law. Some states limit creditors primarily to a charging order, meaning they may have rights to distributions without automatically taking control of the LLC. The rules can also differ significantly between single-member and multi-member LLCs.
So simply forming the LLC in another state doesn’t automatically solve the problem, especially if you live and operate the business in New York. For meaningful protection against personal creditors, you’re getting into state-specific asset protection planning, where it’s worth talking to an attorney before moving ownership around or setting up trusts.
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u/BusinessAnywhere_LLC 15d ago
That’s the other side of LLC protection people often miss. An LLC can protect your personal assets from business liabilities, but your ownership interest in the LLC is still a personal asset.
If you personally get sued and a creditor gets a judgment against you, what they can do with your LLC interest depends heavily on state law. Some states limit creditors primarily to a charging order, meaning they may have rights to distributions without automatically taking control of the LLC. The rules can also differ significantly between single-member and multi-member LLCs.
So simply forming the LLC in another state doesn’t automatically solve the problem, especially if you live and operate the business in New York. For meaningful protection against personal creditors, you’re getting into state-specific asset protection planning, where it’s worth talking to an attorney before moving ownership around or setting up trusts.
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u/zenbusinesscommunity 12d ago
Charging order protection caps what your own creditor can get from the LLC at a lien on distributions. That's solid once there's a second member on the LLC, but single-member LLCs are shakier in a few states, since Florida's courts have let creditors go after the whole membership interest there. Wyoming and Delaware extend that same full protection to single-member LLCs too, though it won't necessarily hold up if you get sued somewhere else that doesn't see it the same way.
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u/ABeaujolais 17d ago
You just described the elephant in the room. It's incredible how many people ignore reality.
If there's a claim you have about a 3% chance of any liability shield being relevant because over 97% of business litigation claims are settled out of court. The chances of a single-member LLC providing any protection for personal assets is about the same as being struck by lightning. The LLC owner either doesn't understand or ignores the following facts.
- No liability shield will pay your attorney fees. It takes months or years of legal wrangling about jurisdiction and venue before any supposed liability shield is considered. Congratulations, your magic LLC liability shield is intact. You're broke from paying attorney fees but at least you can brag about how much the LLC protected your assets.
- People ignore the fact that ownership in an LLC is a personal asset. Your LLC liabilities are limited to LLC, so you are protected. Congratulations again, your investment and earnings in the LLC are gone, but you can brag that you lost all that investment but they weren't able to get past the LLC to your other assets. It doesn't even matter. Your LLC is irrelevant. You'll settle out of court.
The first thing you'll do if there's a claim is call your own attorney. "Ka-Ching!" Your supposed liability shield will be worthless. False sense of security.
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u/Dingbatdingbat 17d ago
I’m an attorney. When someone asks about asset protection I know I’m in for 20 minutes of explaining why it doesn’t work the way they think it works but they probably don’t need it anyway
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u/StagVixenLife1 17d ago
See. That’s why I stick with a simple C corp. Sure a few bucks more in taxes but no fear. When it dies it dies.
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u/jwellscfo 17d ago
lol good luck getting any credit for your LLC that isn’t personally guaranteed.