Can I create an LLC to put my assets into it in case I am personally sued

Question

This is kind of the reverse of what typically people do. Typically an LLC is created to protect the owner's assets if the LLC is sued. I'm looking at it in the reverse order. If I put my money into an LLC and I am personally sued, is that LLC safe from collapsing and having the assets taken from it even if the owner is sued, that being me. Example. Let's say I own Burger Joint LLC and it's going along fine. I have all my money tied up in it. I happen to get into a car accident, it's my fault and my insurance doesn't cover all of the medical damages that occurred to everyone. The victim sues me for the difference which I do not have. Would my LLC be safe or would I have to liquidate that in order to cover the victim?

Answer 1

Even if the LLC was safe, that wouldn't help you.

If you set up this LLC (and ignoring complications like taxes if the LLC owns your house, you have to pay rent to the LLC for living in it, the LLC has to then pay taxes on that rent, etc.) and put all of your assets in it, your assets would then consist entirely of stock in the LLC. If you're at fault in the accident, you'd have to sell some of that stock to someone else to raise the money you need to pay the accident victim. Or you would have to have the LLC sell some assets in order to pay you a (taxable) dividend that you'd then use to pay the accident victim.

Practically, it is also highly likely that if you tried to do something like this, you'd spend a lot of time and money for no benefit. If a corporation exists solely as your alter ego, it is highly likely that courts would simply pierce the veil and treat you and your corporation as a combined entity.

Answer 2

You own the LLC, which could be seized since it's your property

(I'm not a lawyer) If you were personally sued then the court would look at your assets - one of which is an LLC with all your money in it. They could determine you either have to pay up get a payout from the LLC.

In practice, this is a really dumb thing to do so nobody with money to protect would do it

The real way to protect yourself is to be sure you have enough insurance coverage that no one would go after you. It'll be much cheaper than trying to hide assets via an LLC.

If you put assets into an LLC, then you'll lose stuff like "homestead exemptions" in many states that lower your property tax. You'll likely have to pay more for insurance in general since now everything is a business expense instead of a personal expense.

And before you say trust or foundation - one thing that lets courts "pierce the veil" is intermingling work and personal assets. The best way to protect yourself is a good insurance policy.

EDIT to further explain why the LLC won't protect you.

One commenter mentioned ambulance chasers - a.k.a. lawyers who help accident victims sue. A good insurance policy protects you from them as well.

Let's say you cause an accident and break someone else's leg. Your bodily injury coverage will step in, pay the hospital bill, and likely "pain and suffering" and make sure the victim can't sue you directly since they've settled.

If you did go to court, the insurance would pay-out. Assuming you aren't woefully underinsured both sides will go with an out-of-court settlement because it's faster, cheaper, and private.

Even for a legitimate LLC business, courts can issue Charging Orders, which put the creditor first in line to any payout. They can also foreclose on the LLC and dissolve it in some states, especially if it's a single owner LLC.

If you've mixed personal and business, the courts can "Pierce the Veil" which means they determined the LLC is a front for your private assets, and will count the LLC's holdings as your own.

The courts can and do issue orders to get money out of LLCs for unrelated debts. It doesn't happen that often. There are usually easier ways to get money out of people, and many businesses operate in the red, in which case the LLC is likely worthless.

Answer 3

It is not a way to protect yourself from a personal judgment. Regardless of whether the assets of the LLC are considered your personal assets, the LLC itself is your personal asset. It is just an investment you happen to own, no different in principle from owning publicly traded stocks.

Your assets of any kind (with limited exceptions, such as retirement accounts) are subject to being seized and liquidated if you refuse to pay a judgment.

If you owned a fraction of the LLC rather than 100%, then only the fraction you owned could be seized for a personal judgment.

Answer 4

Asset Protection by Adkisson & Riser is really the book to read on this subject. It's one of the few intelligent asset-protection books that isn't out to sell rubbish like Cayman Island trusts and the like.

The court will invade a single-member LLC

That's because you are the debtor, you own the whole thing and no innocent person will be affected. Liability shields do not work in that direction.

Certainly an LLC that by all indications is set up to shield assets, will be quickly pierced.

The only way to avoid this is to show the court that the LLC is a bona fide business, and a going concern, and stripping assets would do more harm than good.

For instance, suppose the LLC is a McDonald's franchise that's going strong and making $100,000 a year profit. The debtor* would argue that seizing the cash registers, fryers, grills, inventory and furnishings would be senseless since it might raise at best $50,000 at auction. Judges would not want to "kill the golden goose". because that would do disproportionate damage to the debtor.

Multi-member LLCs have innocent parties

As such, courts will not break into such an LLC lightly; they don't want to harm the other member(s) who are entirely innocent in the matter. I once saw someone get away with shielding much of their assets from the IRS by putting it in a two-member LLC owned 90/10. I couldn't believe it worked, and I wouldn't count on it working regularly.

Against a multi-member LLC they can get a charging order

A charging order says that When (if!) the LLC distributes profits to its Members, the debtor's share is paid instead to the creditor.

However, the managers of the LLC aren't required to distribute profits. It's absolutely possible for the LLC managers to agree simply to not distribute profits to anyone until the creditor settles and goes away. So the managers can "string the creditor along forever" and assure them zero chance of collecting except on the manager's terms.

Of course if this is done excessively, the creditor might go into court and argue exactly that, and the judge might compel a distribution. Might.

Couldn't the creditor seize shares and become a Member?

Bad idea. For one, the creditor doesn't want to be in the business of whatever that LLC does.

But they would have a special vulnerability if it is manager-managed instead of member-managed (and also has the usual "pass-through" tax treatment). The manager could run the business for paper profits, forcing the Members to pay actual real taxes on those profits... and then, as above, never do any distributions.

The hostile creditor-member would find themselves paying a fortune to the IRS every year, but never getting a penny to show for it.

Answer 5

An LLC will not do this effectively since you still own the LLC, so it can be claimed by someone who is suing you.

What you are looking for is an asset protection trust. There are various flavors. If you want to be really safe from lawsuits, the trust needs to be established in states with laws that protect the trust (such as Nevada or Wyoming) and/or be controlled by someone else. Even better, it can be an offshore trust in a location that does not enforce US judgments.

Protecting assets from lawsuits is a complex legal endeavor and not 100% foolproof. For that reason, you will need to actually hire a lawyer to get things set up correctly. Sadly, setting up something simple like an LLC will not cut it.