The “Asset Protection LLC” – It used to be all South Carolina LLCs where the same. What ever LLC operating agreement was on the word processor or on the form book CD was the one you sold to clients. Embarrassingly, these LLCs are still nearly omnipresent.

Good news is it will not matter what kind of LLC you have if you are never sued and the average LLC owner is not sued.

Bad news is you may not be the average LLC owner.

Truth is South Carolina LLCs have great asset protection potential but they do not come “out of the box” as great asset protecting entities.

Truth is your attorney needs to draft LLC asset protection provisions into almost ever generic LLC operating agreement section, asset protection must be the focus of all initial LLC organizational decisions, and the LLC owner better have learned during LLC organization how to correctly operate the LLC going forward.

Our “Asset Protection LLC” is designed and drafted by a former South Carolina litigator, a former creditors’ attorney, who switched “sides” and now concentrates his legal practice on the opposite side of debt collection, asset protection and estate planning. His experience as a creditors’ attorney using litigation discovery to find assets and weaknesses in debtors’ entities, prove fraudulent conveyances, and applying the law to shoot holes in debtors’ legal arguments in court and more importantly in settlement negotiations has been applied since 2001 to evolve the generic South Carolina LLC into this firm’s “Asset Protection LLC”.

If you like details or want to check a current LLC for asset protection features (or the lack thereof), go to http://LLCsforSouthCarolina.com - our firm’s website dedicated to our Asset Protection LLC.

Some LLC Asset Protection Theory and
Rules of Thumb

1) Inside and Outside Claims - “Inside” claims are those that arise from an LLC owned business, LLC property, or LLC employees which should be contained within the LLC thus exposing only LLC assets to liability and protecting the LLC owner’s other assets. “Outside” claims are those against the LLC owner that are not related to the LLC and thus should be blocked from assets owned by the LLC.

2) How Many LLCs - Use separate LLCs as boxes to separate “hot” assets (assets that statistically generate more lawsuits - like rental real property) from “cold” assets (asset that statistically don’t generate lawsuits - like a brokerage account). Plus separate “hot” income producing assets and “hot” assets with equity or appreciation potential from each other and from your other “hot” assets.

3) Charging Orders - A judgment against an LLC owner but not against the LLC gives the creditor two options against your LLC’s assets. One, he can “pierce” the LLC and directly get its assets because you did not have an “asset protection” LLC and/or you did not understand how to operate your LLC properly or as happens 99% of the time the creditor’s attorney scares you into thinking he can pierce your LLC and thus wrings a bigger settlement out of you. Or two, he gets a “charging order” against the LLC which allows him to receive your LLC distributions but nothing more (again assuming you have an “asset protection” LLC).

4) Charging Order Blocking Entities - If income from the LLC is important to you and you intend to have it continue to be distributed, just not to you, than a combination of LLCs and/or Trusts is used or contrary to what you read on the Internet, a judge will force your LLC to make distributions to you and your “charging order” creditor will get them.

5) Value of a Third Party in LLC Ownership – A boost to asset protection comes because judges are reluctant to undo or label an LLC a sham if it would harm a third party owner who is not a debtor of the attacking creditor. The third party can be an associate, partner, friend, parent, sibling, spouse, or child (though spouse and child are the least effective). The protection of a third party’s interests in the entity is the underlying legal justification for “charging order” provisions.

6) Separate Assets from the Business/Practice - Lease Back LLCs – Put business/practice revenue producing assets or appreciation potential assets (equipment, office building, etc.) in their own LLC(s) and lease them back to the business/practice for “hot” “cold” asset separation and protection and tax efficiency. Use a “creditor” lease which has you drive a harder bargain with yourself than in a typical commercial lease because you want it to be difficult for a creditor in the shoes of the lessee LLC to continue to use the rented asset.

7) C Corp Taxed LLC – If C Corp business taxation benefits are not otherwise available to client(s) than use a separate LLC taxed as a C Corp to managed other LLCs. This provides a platform for all corporate tax benefits to be used by the family and works for Section 79 Plans as well.

8) One Size Does Not Fit All - Different LLC operating agreement provisions must be used for the different “type/purpose” LLCs and different client circumstances and expectations require different options and choices be offered to clients during LLC organization. If you did not have numerous choices and options during the organization of your LLC and drafting of its operating agreement, you did not get an “Asset Protection” LLC.

9) Three Basic LLCs Types - Not One - 1) Asset Protection LLCs for businesses, real property, and investments; 2) Family Control LLCs for family businesses and/or family estates below the dollar amount for estate tax; and 3) Family Estate Tax Reduction LLCs for estates above the dollar amount at which estate and gift tax kicks in (currently in flux but not likely to stay that way). Determine the challenge to your LLC; is it creditors, IRS, co-owners, family members, and then plan and choose LLC “type” accordingly.

10) Family Control LLC – This LLC stresses single client or Mom and Pop continued control throughout, especially voting provisions and buy out provisions. Where needs be control is emphasized over asset protection. This LLC is drafted to dove tail with Living Trusts and other estate planning entities and for gifting LLC interests to the next generation.

11) Family Estate Tax Reduction, LLC – The purpose of this LLC is to follow the letter of the ever changing tax law to minimize estate, gift, and generation skipping taxes (currently in flux but not likely to stay that way). This is the only LLC I do not entirely draft myself. The tax provisions must be modified constantly by tax experts and I rely on Wealthcounsel, LLC to do that for me - www.wealthcounsel.com. Their software allows me to tweak their tax document to add asset protection provisions.

Attorney Mason Salisbury practices asset protection and estate planning law with Pelzer and Salisbury, LLC in Charleston, South Carolina. He can be reached at msalis1219@aol.com