I’ve written on this blog before about how useful a Limited Liability Company (LLC) can be when protecting your assets as well as Single Member LLCs. A single member LLC is simply an LLC with only one member.  Originally an LLC designation was for companies with 2 or more members, but states gradually amended their LLC acts to allow single member LLC’s, and now all 50 States and the District of Columbia allow SMLLC’s.

Single member LLCs can be especially useful for entrepreneurs starting a new business, or smaller mom & pop investors.  Similar to a corporation, an LLC provides a shield between the debts and profits of a business and the personal assets of its members, known as the ‘corporate veil’.

Unfortunately, recent developments have left SMLLC’s as asset protection vehicles in question.  Although many in the asset protection community are critical of recent rulings, voicing that it is just another insult to the smaller middle class investors who are struggling in this difficult economy, providing the greater protection to the larger investor with higher assets involving two or more investors.  If you currently have a SMLLC it may now be prudent to add an additional member to your LLC to guarantee protection.

There have not been any rulings in California as of yet, but recent rulings in other states bring into question whether a single member LLC will be viewed as simply an alter ego of the member in the courts, spelling big trouble when someone tries to attack the viability of the entity.  This could in effect allow creditors or other interested parties to pierce the corporate veil of protection and go after assets held in the LLC or the personal assets of its sole member.

Some things to keep in mind when considering adding members and changing your operating agreement are:

  1. Be sure that you are not adding what courts might consider ‘peppercorn’ members.  Additional members must own a substantial percentage of the LLC to be considered legitimate members.
  2. Stock transfers must be purchased at a reasonable fair market value.  Transferring ownership to a family member for a nominal investment may not be considered legitimate in the eyes of the court and could be ruled a fraudulent transfer.
  3. You will need a new operating agreement when adding additional members, detailing the new terms and conditions of the member relationship in detail.  There are many new issues that will arise upon adding a new member that must be well documented.

Adding members or changing your operating agreement is something that must be addressed before you have any indication or expectation of being sued.  Anything done after the fact would be considered fraudulent.

If you currently have an SMLLC or have questions regarding asset protection of any kind, please contact me.   I will work closely with you to create a plan that fits your personal needs, ensuring that you achieve your goals and leave a lasting legacy.

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