If you are not a citizen of the US, you can opt for a US based LLC, which for non US citizens can act like an offshore corporation [IBC], with the added advantage of making it easier to conduct business in the US.
However, many of our US based clients have asked us what to do in the situation where they have non movable US assets, such as real estate, a business, etc. How can they protect these assets from frivolous lawsuits and all of the other hazards of owning a large asset in the US when you also are a citizen or live there.
We therefore present the New Mexico LLC. [we can also do Nevada and Deleware LLC’s on a custom basis, just ask. We do, however, have to charge a lot more for a custom structure like this].
With real estate, a property owner incurs a significant set of liability risks, such as: (1) Tenant, or uninsured contractor, injuries or damages to their possessions. (2) Trespassers or visitors who injure themselves on the property, even if while engaged in illegal activities. (3) Remediation costs for hazardous wastes found on the property, even if it is due to illegal dumping or is due to activities preceeding the current owner’s stewardship. The owner’s financial well-being is at risk if the property is held in his or her name. Any judgement that exceeds the limits (which can be zero for some risks) of the liability insurance policy covering the property will end up as the owner’s personal liability. But if the property is owned by a stand-alone legal entity such as a trust, LLC, or corporation, only the entity’s assets can be used to satisfy a judgement.
The LLC Alternative
A Limited Liability Company (LLC) is like a C- or a Subchapter S-corporation in that it exists as a distinct legal entity vis a vis its owners. As the name itself implies, an LLC offers liability–limiting protection to its Managers and its owners, the later who are called “Members”. Either party’s liability is limited to their equity at stake in the LLC. Absent misconduct and other legally mitigating circumstances, a Manager or Member would not be held personally liable for any of the LLC’s liabilities – for example, those liabilities remaining after the LLC’s assets and insurance coverage were exhausted in an attempt to satisfy a legal judgement.
Unlike a C-corporation, but similar to an S-corporation or a partnership, an LLC does not necessarily pay direct income taxes. If a partnership-like tax status is chosen, profits and losses will “flow through” to the LLC’s Members, who then include the profit (or loss) in their personal taxable income. Unless your marginal personal tax rate is far higher than the marginal corporate tax rate, eliminating this layer of taxation will be financially beneficial. (And even if that odd circumstance were true, there would still be the issue of taxes down the line when the corporation’s retained earnings are paid out as dividends.)
LLC’s have a further potential tax advantage when dealing with real property versus either kind of corporation. If held by a corporation, the exchange of property for another one of approximately equivalent value (a “like-kind exchange”) would be considered a sale. Any capital gain would be taxable. However, if the property were held in an LLC, the like-kind exchange would not be considered a sale and there would be no taxes – no matter what the hypothetical capital gain would have been.
Asset Protection and Charging Orders
Tax advantages aside, the asset protection benefits of the LLC discussed so far are not very different – at least in theory – from those of a corporation. But if you sustain a personal liability, e.g., due to a malpractice lawsuit, and a claimant attempts to seize your ownership interest in an LLC, an important and interesting distinction surfaces.
If minimally prudent standards were used in setting up the LLC, the judgement creditor is not permitted to simply seize your membership interest in the LLC. Legally, an LLC is looked at much like a partnership. Where there are two or more members in an LLC, it would not be equitable for a court to convey a judgement debtor’s interest in the partnership to a third party, because the court would in effect be forcing an additional member into the partnership in the person of the creditor. Thus minimally prudent standards include always having more than one member in the LLC in order to avoid this imposition. Having multiple members instead avails the members of the asset protection afforded by the charging order rules.
A charging order (CO) against an LLC Member grants the claimant the right to receive the portion of the distributed profits that the LLC Member would otherwise by entitled to until the judgment is paid. The CO does not grant any voting rights, or otherwise confer any managerial control. This is quite different from shares in a corporation, which would in standard cases come with voting rights attached. In particular, an LLC charging order holder has no legal capacity to force the LLC to make any distribution of the profits. However, the profits the CO holder is entitled to will be treated as income, and taxed as such, whether those profits are distributed or not! A tax liability unaccompanied by a cash distribution to pay it may seem like a dubious “asset” to the creditor.
This leaves the LLC management in a powerful position with regard to the charging order holder. The Manager (perhaps you) can elect to retain all earnings and deprive the creditor of the funds. The Manager could turn around and loan the funds to the Member – or a party/entity friendly to the Member – giving the Member access to the funds without granting any access to the creditor. It does not require much imagination to see where a creditor’s negotiating leverage would be substantially diminished by the use of an LLC.
It should be noted that holding property in an LLC may not always be advisable. For example, if the property to be protected is the owner’s principal residence and the property owner lives in a state with very strong homestead laws – such as Florida – it is likely that the homestead laws will provide far more protection if the property is held in the owner’s name than if it is held within an LLC.
Nevertheless, for those that have substantial U.S.-based physical assets, the New Mexico LLC remains worthy of serious consideration as a domestic asset protection alternative.
Combining a U.S. LLC with Offshore Entities
Having laid out the general benefits available from using LLCs in your asset protection planning, let us consider some specific example cases. Returning to real estate, say you are convinced that moving a property out of your name and into an LLC structure of some sort is a good idea. For the sake of expositional convenience, we will consider two future possibilities, broadly conceived, where the asset might have to be defended against a legal attack:
- You sustain a personal judgement against you, and the judgement creditor is now coming after you and whatever assets of yours can be attached to satisfy the judgement.
- A judgement is entered against the LLC, and the judgement creditor is now coming after whatever assets owned by the LLC can be attached to satisfy the judgement
The charging order discussion above is, of course, relevant to case #1 above. We already know that there must be at least two Members of the LLC for it to serve as an effective asset protection device. Who or what should serve as the second Member? To be concrete, consider one Mr. John A. Smith who owns a rental property that is a single-family dwelling, with a market value of $250,000. The property is owned outright – there are no existing mortgages. Here is an approach:
A New Mexico LLC by the name of JAS Properties, LLC is formed by International Acquisitions, Inc., a Panama Corporation, and Mr. Smith. International Acquisitions is the major owner, holding 95% of the LLC’s membership interest. Mr. Smith holds a 5% interest and serves as the Managing Member. In exchange for his interest in the LLC, Mr. Smith quitclaims title in his rental property to the LLC. Should Mr. Smith have the misfortune to become a judgment debtor in the future, the most the creditor can do is obtain a charging order against Mr. Smith’s 5% membership interest. The offshore Panama Corporation is extremely well insulated against any liability claims as long as it is run in an arm’s-length manner that does not invite an alter-ego claim (such as might be the case if Mr. Smith owns all of and manages International Acquisitions).
A portion of the rental income from the property can be diverted to Mr. Smith as compensation for his services as the Managing Member of the LLC. A judgement creditor could try to attach this compensation, but the compensation arrangement could also be quickly and judiciously changed. Rental income not paid out as compensation can go towards maintenance and repair of the property, be reinvested, or be distributed to the members unless and until a charging order comes into effect.
Segueing into case #2 above, once the above arrangements have been instituted we now have the situation of an LLC owning a property worth $250k with no liabilities offsetting that. Thus the $250k in value is at risk if the LLC is found to be legally liable for any damages that exceed the coverage of the LLC’s liability insurance policies. Of course it is sensible to buy insurance coverage appropriate for the situation (consult competent professionals in this matter). Addition protection can be obtained as follows:
The Panama Corporation now loans $250,000 to the LLC and files a mortgage lien against the rental property, effectively removing the equity from the real estate. The LLC, JAS Properties, can turn around and loan that $250k to a WIL Trust, in exchange for a note bearing interest at 8% per year. The WIL trust is able to invest that money offshore in a tax-free, friendly investment environment, and generate in excess of the 8% per year required to service the loan.
Why New Mexico?
The corporations and LLCs of other states such as Nevada, Delaware, and Wyoming are far more heavily promoted, but a New Mexico LLC offers the same or superior benefits to its better-known counterparts at a fraction of the price ($900 to set up using OffshorEarnings). The superior benefits are the much lower profile New Mexico LLCs make possible. In New Mexico, only the following is required for the Articles of Organization:
- The name of the company and the address of the principal office, which can be a “mail drop” or that of some other agent. The address can be anywhere in the world.
- The name and address of the Registered Agent. All states require that corporations and LLCs have a Registered Agent in that state who can receive “service of process” on behalf of the company.
- The duration of the LLC, which can be limited or perpetual.
New Mexico does not require that the names of the owners be included in any public records. The LLC Members’ and Managers’ names will not appear on any document other than your Private Operating Agreement. Other than a $100 annual fee for the Registered Agent, New Mexico LLCs incur no annual fees. There are also no annual reporting requirements, hence changes in ownership are not recorded publicly. States like California levy an $800 or more annual franchise tax!
We would like to point out that online “incorporation mills” do not preserve your anonymity or privacy, nor do they necessarily include the followup support. Our New Mexico LLC provides you with exclusive operating agreements and proprietary support documents. These documents are specifically written with privacy and asset protection in mind.
To purchase a New Mexico LLC with Bitcoin, Perfect Money, Payeer, or wire transfer, please contact us at our Helpdesk.