Whether you form an LLC in Wyoming, New Mexico or Colorado, chances are you established the company in part for its asset protection benefits. This page is a checklist for maximizing those benefits. During these litigious times, here are things to keep in mind:
I: Properly Title Your Property. Any asset you wish to protect must be properly titled in the name of your LLC. Property not titled in the name of your LLC will not be protected from creditors.
II: Obtain Endorsement for Title Insurance. Transferring real estate to your LLC may result in a loss of title insurance coverage. As a precautionary measure, we recommend you obtain an endorsement to your title insurance policy naming your LLC as an additional insured. There may be a nominal cost to secure an endorsement, but it is an expense worth spending.
III: Obtain Endorsement for Property and Casualty Insurance. When transferring real property into the name of your LLC, it is important that the property and casualty insurance policy be modified to reflect the name of the LLC as an additional insured. Most insurance companies do not charge additional premium to add an LLC as an additional insured. It is important the insurance company is aware of the transfer and all requirements for maintaining the policy in compliance.
IV: Treat Your LLC as a Separate Entity for all Purposes. There is a theory in creditor protection known as the “alter ego” theory. It means if you fail to respect the separateness of your LLC, it will be ignored by the courts because it has been ignored by you and, therefore, a successful litigant will be able to take the LLC’s property because you failed to treat it in the formal fashion the courts demand.
V: Use the LLC’s Federal Employer Identification Number. All financial business conducted by the LLC should be done using the FEIN. None of your financial or business assets should be reported under your personal taxpayer number. This is as important to maintaining the asset protection features of the LLC as with titling all of your business and financial assets in the name of the LLC.
VI: Open a bank account in the name of the LLC. Use your Federal Tax Identification Number. All income and expenses must go through this account. It is preferable to have a separate bank account for each subsidiary. If you choose to use one bank account, please make sure to keep detailed records that track the income and expenses for each subsidiary.
VII: Treat all of the Members Equally. If the managing members decide that a distribution of profits is warranted, all members must receive their proportionate share of the distributions. If you control the finances of the LLC as though it is merely an extension of your pocketbook, the courts will do likewise and the powerful asset protection features will be lost.
VIII: Income Tax Reporting. Because all of your financial activities are to be operated in the name of the LLC, it must file its own income tax return. If you have subsidiary LLC’s, they will not need to file a separate return, only the master will file. The LLC is treated as a partnership or a sole proprietorship for federal income tax purposes and, if a partnership, will file a Form 1065; otherwise, the LLC activities will be reflected onto your Form 1040 if a sole proprietorship. Your accountant or other tax preparer can assist you in filing the return. Each member of the LLC, if a partnership, will receive a Form K-1 that includes that member’s share of the financial activity of the LLC to report on their individual tax returns.
IX: LLC Meetings. We advise clients that an annual meeting, with minutes similar to what would be required for a corporation, are strongly advisable. Please keep minutes of what was discussed and who attended the meeting, and file the copy of the minutes in your LLC file. We suggest you choose a day, perhaps a birthday or other important day, so you develop a habit of having the meeting at the same time each year. If any member is not able to attend, they should be given a copy of the minutes to sign and return to the managing member. This requirement is not necessary for Wyoming Close LLCs.
X: No Personal Expenditures from LLC Funds. Under no circumstances, unless from a distribution approved by a vote of the members, may LLC funds be used for personal purposes not related to the operations of the entity itself. This is essential to maintaining the separate stature of the entity and avoiding a loss of asset protection.
XI: File Annual Reports.You will receive a notice each year from the Secretary of State that you must file an annual report. If you neglect to do so, your LLC may be administratively dissolved, which will leave you with no asset protection, so please be sure to promptly file your reports. Note, New Mexico LLCs do not have an annual report to keep up with. This significantly lowers the cost of operating the company over its life.
Every limited liability company offers protection for personal assets from business creditors. This is called the corporate veil and is why LLCs have "limited liability" in the name - your liability is limited to what is in the company. In Colorado, New Mexico and most states, it is relatively easy for a personal creditor to seize your LLC to satisfy a personal judgement. For example, if you get into a car wreck and are the only owner of an LLC, if you cannot pay the judgement in full using your personal funds, then a judge may order the LLC be seized and its assets sold to satisfy the claim.
This is, for obvious reasons, a less than optimal outcome. Those with personal credit concerns should consider a Wyoming LLC. They offer "charging order protection". This means personal creditors cannot attack your LLC and force sales or distributions. Learn more about forming a Wyoming LLC and their asset protection features here.