Everybody thinks that they’re super protected with an LLC, right? Why all being Abada tell us like the dark side of these LLCs, are they truly Bulletproof there’s there? There’s nothing. That’s truly Bulletproof, especially if it’s purely domestic, like whatever you create, eventually, if you get to a high net worth.
So like you have over a million of unprotected net worth. Of assets, you should start adding some sort of offshore component to it because we have, what’s called the U S constitution, full faith and credit clause. So it’s always going to limit anything, purely domestic LLCs. I’m not going to like cuckoo all over them.
They’re I use them. They’re a foundational level, but there’s a lot of things that aren’t just being. Spoken about them. And a lot of people being misled, I think either intentionally or not, or just from lack of knowledge on what happens in court by can these things called jurisdiction and legal, nexuses availing yourself of state rights and that’s where this needs to get sorted out.
And then I’m going to pick on California a lot here because it’s the most, a lot of people live in California. There’s a lot of money in California. I mean, you have a lot of California investors investing all over the state. So I think it’s a great example of a state. To use. And so I want to start with, like, I think the big misconception is with charging orders and what a charging order is, is trying to limit the member of an LLC legal responsibility to paying a judgment.
They try to keep it within just the LLC a court order just within the LLC. And so you hear these states. And there’s a lot of confusion over where do you go? Do you go to Delaware, Wyoming, Texas. And at the end of the day, it really just comes down to what are you holding? So let’s just stick with the example of the state I’m talking about.
Let’s say it’s California real estate, and you own some California real estate. You’re a California resident. And you went and set up a Wyoming LLC because you read it on the internet or your CPA told you to go ahead and do that. What you did is just convert your Wyoming, LLC to a California LLC, because you’re doing business in the state of California.
And not only are you going to pay the franchise tax, but if you ever have a liability issue in California, the judge in California is going to apply what law, California law, not Wyoming law, because you’re a resident there, the properties there, the lawsuits coming through there, a California judge doesn’t give a hoot that you have a Wyoming LLC.
There’s no legal nexus there that Wyoming LLC just did a fancy thing called legally available. For the protection of laws of California, as, like I said, that’s the state, the assets in that’s the state, the injury or damage occurred in. And this can go for any state. If you had an asset in Ohio and you put it in an, a Wyoming, LLC is the same principles that apply.
And so I want to harp on this just a minute longer because I do get a ton of calls on this and clients just confused as heck on what they shouldn’t stuff into a Wyoming, LLC. And it’s because just by simply owning an out-of-state LLC. You have to register that LLC is doing business in the other state, but you have to register it in California and pay the franchise tax.
And this is just basic case law. And once you do that and you, again, avail yourself of the privileges and laws of that state and given that state jurisdiction, there’s a great case. Indian palms country club association versus anchor bank in 2015. And it lays out all the multiple standards, like the legal standards that you’d have to meet to successfully beat a piercing, the corporate veil argument.
And so for sticking with California, now that LLC is registered and paying the franchise tax in California, you just gave California jurisdiction over the LLC, plain and simple. And you’re a resident of that state. There’s another caveat against you. And then you have a California asset in an out-of-state Wyoming, LLC, or Delaware, LLC in Nevada, LLC, with no connection to Wyoming whatsoever.
You just did this fancy word. I told you about avail yourself of the laws of California. And so you just transferred that Wyoming, LLC to a California LLC by was called a direct, substantial and systemic contact, California. Something I see common, cause I always see the tail end of this. Especially when my clients work with me and there we’ll have us, most of the time is like the lawyers just going down their check sheet and the sales form and ask the client like, Hey, do you want to be anonymous?
And then the clients always say, oh yeah, I would like to be honest. All right, sign you up for this thousand dollar Wyoming. And we’ll see, which is also a pain in the butt to upkeep in the future. That’s the classic case. And I tell my guys like, all right, like how you’re saying, it’s not truly anonymous, but like anybody who’s going to get sued, they’re going to Pierce right through that.
It’s just going to make things a little bit harder, right. This day and age, nothing ominous. And that was going to be my next blow up of this whole thing of an amenity. And so it’s a big concepts, a big misconception. And I think that. People just think that you can create this anonymous Wyoming, LLC. It sounds so cool.
Like I can just disappear and ghost a lawsuit and I’m like the legal system doesn’t work that way. Like one, if you’re creating these LLCs, you have to also pay for a registered sir person like service of agent and that costs money, their sole job. Is to say, Hey, congratulations, your LLC just got sued.
You’re served, go find a lawyer, defend yourself. And then the simple reality is that once a lawsuit’s filed and starts and you’ve been served because you’re not going to avoid the legal service, the legal process starts. And this is thing called legal discovery. And then you’re going to end up going into court.
And the judge is going to say, Hey, you’re getting sued for $1 million or whatever the law and the number is like, here’s an asset declaration list. All of your assets. To make sure that there’s something that can be collected on. And at that point you can do one of two things. You list your assets or you lie and commit perjury and say you don’t own them.
Or the LLC doesn’t own any. And then that’s called perjury. You go to jail, you get sanctioned, your lawyers get sanctioned, and a lot of bad things happen to you. So there’s no such thing as an amenity. Once a lawsuit starts and amenity works in the sense of. I own an LLC. I want some privacy to where someone can just look up my house residence and go egg my house and harass me because they don’t like it.
And if they’re resourceful enough, they can find all that stuff. I have access to all that stuff. I just use a scraping program and a skip tracing program. And I can find where you used to live, which your cousin’s name is where they live, but their number is what’s your dad’s name. No, exactly. So I think that a lot of these burns are just.
Spraying on the naivete of a lot of people and the idea of, oh, wow. So you’re telling me I can just become a ghost by creating this anonymous LLC. And no one will ever be able to find me. And if I did get sued, I never have to respond and show up. Sorry. Like, you’re going to have a default judgment entered against you and you wouldn’t even be there to know.
And then you’re going to end up having to pay the maximum amount because you didn’t even try to defendant along the lines of this. Anonymity thing is more from a tax perspective. Again, Brian’s the lawyer on hand here, but just speaking for taxes, this is corporate transparency act that got enacted in January, 2021.
So now I guess what they were trying to block was people were just making all these random LLCs and none of it kind of points to them personally. And they were possibly hiding a bunch of nefarious action or maybe just hiding disproportionate amounts of income and expenses likely it was happening as most good business operators try to do to some extent.
But now on a lot of key ones, we have to put social security numbers on there, even if you have LLC. So a lot of investors got an upset with us and it’s like, Hey man, it’s not our fault. We’re just following the corporate transparency act. So even now the IRS is like blowing this way up. There’s nothing that’s transparent.
There’s really nothing. And that’s a real like asset protection for it to work. You want it, you do not want to be not paying your taxes. You’re going to have to pay your taxes. Otherwise that’s tax fraud. And the system blows up or you don’t want to be committing fraud or fraudulent transactions and things like that.
So whenever you’re creating an asset protection plan, it has to be taxed neutral, and this whole idea of an amenity and hiding if you assets. That’s bad. Like IRS is going to come down on you. Like the judge is going to come down on you. So fraudulent transfers after a lawsuit. That’s why you have to be proactive.
When you create these in Korean, before issues, before problems, these are all the things that you need to think about. Get your system set up as a business structure early, and then let it grow with you. But like you said, like even the IRS is cracking down on asset disclosures. We have a system that’s as strong where you don’t have to hide.