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WARNING ON New York CORPORATIONS & New York LLC'S

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CREDITOR RIGHTS AND THE CHARGING ORDER PROTECTION

Why file a Wyoming LLC in New York?  What's the advantage of doing business with a Wyoming LLC (filed in NY) rather than operate from a New York LLC?

Let's state the problem:

You have a real estate property in New York.

The problem:  The property's equity is of public record.  The owner of the property has produced a valuable litigation target.  Even if the bank has a first priority lien against the property, the remaining equity is available to a judgment creditor.  If a sale is forced, the funds are available to the creditor after the first lien (to the bank) is satisfied.

The available equity is found through an asset search.  Whether the property is owned by you or a New York LLC, the information remains available.

The solution:  Ask your attorney about monetizing a real estate asset.  How is that done?  You simply convert the equity of the real estate into a lien.  The Wyoming LLC files a lien against your real estate in NY.  The equity in the property has just shifted from New York to a Wyoming LLC with a Wyoming address.

Before a creditor goes after you, he'll do an asset search.  He will see the property and the lien.  You're in a better position to negotiate a settlement with your properties looking poor in equity.  In a bad situation, you could default on the loan to the LLC.  You could sign over the properties to the LLC to satisfy the lien against the property to avoid foreclosure.

To make the lien legitimate, it's coupled with a promissory note that you owe the LLC an amount equal to the lien.  The interest rate would need to be a market rate.  Insure the lien through the title company.

When you sell the property, the Wyoming LLC will be paid first.  That capital in the LLC bank account serves as the financing for the next property.  In essence, the LLC becomes a financing arm. 

NEW YORK LLC WYOMING LLC DOING BUSINESS IN NEW YORK

New York Consolidated Laws, Limited Liability Company Law - LLC 607. Rights of creditors of members

(a) On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest.  To the extent so charged, the judgment creditor has only the rights of an assignee of the membership interest.  This chapter does not deprive any member of the benefit of any exemption laws applicable to his or her membership interest.

There appears no prohibition of foreclosure of a members' LLC interest.

2015 Wyoming Code

(g) This section provides the exclusive remedy by which a person seeking to enforce a judgment against a judgment debtor, including any judgment debtor who may be the sole member, dissociated member or transferee, may, in the capacity of the judgment creditor, satisfy the judgment from the judgment debtor's transferable interest or from the assets of the limited liability company. Other remedies, including foreclosure on the judgment debtor's limited liability interest and a court order for directions, accounts and inquiries that the judgment debtor might have made are not available to the judgment creditor attempting to satisfy a judgment out of the judgment debtor's interest in the limited liability company and may not be ordered by the court.

Ask your attorney to compare the Wyoming LLC statute to that of New York.

The Wyoming difference:

No foreclosure of member's LLC interest.

No court order for directions, accounts and inquiries are not available to the judgment creditor attempting to satisfy a judgment.

WHAT ABOUT THE OPERATING AGREEMENT?

Many operating agreements are written for ease of understandings and neglect how to protect the interests of the members.  

Check your New York LLC:

  • Is it manager managed?  No?  You need to restate your articles of organization.
  • Do you have at least two(2) members?  No?  You need to add one member in the operating agreement.  A corporation may also be a member.
  • Is the LLC taxed as a partnership?  This is the best choice for maximum asset protection.  If your New York LLC is axed as a corporation or as a Subchapter S corporation then you have less protection.  Your LLC operating agreement should state that the company is taxed as a partnership.
  • Ask your attorney about Revenue Ruling 77-137.  For maximum asset protection, the LLC should be manager-managed, taxed as a partnership and have two(2) members.  If that's not the case, you have choices:
    • Change the LLC you have now.
    • Open another LLC that holds a lien against your real estate.  Handle that LLC correctly.
  • NY LLC's usually make the mistake of mandating an annual distribution to the members.  The judgment creditor only needs to obtain a charging order against the member's LLC, and wait for the Manager to make a distribution.  Then that distribution is paid out to the creditor. 
    • What to do:  Our WY LLC doesn't mandate an annual distribution to the members.  In this way, a hostile creditor cannot wait for the distribution to take place by a certain time of year.  If the manager has the discretion to make the distribution, then the creditor waits indefinitely for funds intended to the member subject to charging order.  There are other devices we instituted in our aggressive operating agreement to look after the interests of the members.  Our operating agreement is hyper-aggressive and designed in-house, and included with every LLC we offer.
 

CONSIDER ISSUE OF LOCALITY

There is a school of thought that since you filed the Wyoming LLC into New York, that you will be subject to NY's interpretation of the charging order.  The key to prevent this from happening is to keep the key assets away from NY.  How could this work with NY real estate?  The equity should be held by an entity that's not in NY.  Let's say a NY LLC or NY corporation holds title to the property.  Consider transferring the equity to an LLC in Wyoming through a lien and promissory note.

The bank account shouldn't be in NY.  Where should you open the bank account?  Consider one of many internet banks.  If your New York LLC has an account in NY, use it for operations only while maintaining a minimum balance.  The reserve cash should be in an account outside NY.

When you write a check from the operating account, you're giving away the account information.  And when you deposit  someone's check into the account of your New York LLC, the cancelled check will contain your routing number.  This is why you need two accounts for your New York LLC.  You need a local and convenient operating account.  You also need a second account for your NY LLC that is outside NY and used as a reserve/savings.

The argument of locality is the biggest concern in states such as New York, California, New Jersey and Illinois.  These are socialist minded states with a large supply of hungry lawyers armed with an asset collection machine.  If you're subject to litigation, and you're the signer on the LLC bank account, consider the following:

  1. Keep the known account open with a minimal amount of funds.  This will serve as the canary in the coal mine when they attach the account.  In other words, it'll give you notice that they are actively looking to attach and freeze assets.

  2. Open a new account using someone else as the signer.

  3. Open the new account outside of the state where the lawsuit was filed.  If you're being sued in NY, open the account with an internet bank such as in Virginia, Indiana, or elsewhere.  Don't open the account in neighboring Pennsylvania, New Jersey or Connecticut.

  4. If the lawsuit is in NY, don't sign on the bank account in NY!  See point #1.  The same applies to California LLC's.  If you're a CA resident with a CA LLC, and you're a member of the LLC, and the signer on the account, it will likely be frozen.  Don't deceive yourself that the process will be fair and just.  Stop gift wrapping your assets to the opposing party.

  5. Resign as the manager of the New York LLC.  Another company may serve as the manager.  Alternatively, another living person may assume the position of manager.

  6. In Wyoming, the manager may be anyone, anywhere in the world.

  7. A new Wyoming LLC can file a lien against real estate in NY at any time.

The above doesn't work with bankruptcy.  If you own any interest in an LLC, please disclose that to your bankruptcy attorney.  Don't hide anything from the bankruptcy trustee.

WHAT IF THE NEW YORK PROPERTY IS IN YOUR NAME?
 

Ask your lawyer how to quit claim the property to the LLC.

 

CAN I LEND THE LLC PROPERTY?  Yes.  Your Wyoming LLC may loan property to the New York LLC or the NY Corporation.  The WY, LLC may also be a member of the NY, LLC.

Ask your attorney about NY LLC Law Section 611.

New York Consolidated Laws, Limited Liability Company Law - LLC 611. Business transactions of a member with the limited liability company

Except as may be provided in the operating agreement, a member may lend money to, borrow money from, act as a guarantor or surety for, provide collateral for the obligations of and transact other business with the limited liability company and, subject to other applicable law, has the same rights and obligations with respect thereto as a person who is not a member.

I am lazy or too busy and don't want to file a lien against my real estate assets.  What else can I do right now that is much easier and cheaper?

You can sign a promissory note that you owe the Wyoming LLC.  You're contributing the promise to pay the LLC a certain amount of money or asset by a certain date, in exchange for an interest in the LLC.  You, the debtor, is in NY, and the promissory note is signed in NY.  Your attorney should draft the promissory note or you may obtain one online. 

If you sign the promissory note stating that you owe the Wyoming LLC in exchange for an interest in the same LLC, the Wyoming LLC can act as a creditor in NY.  And if you're hit with litigation, you can then choose to pay off the WY LLC when it's most convenience to you.  To satisfy your debt to the WY LLC, you can pay the WY LLC with cash, real estate, a lien against your property or any other asset.  You are creating a friendly creditor (Wyoming LLC) and paying off that creditor when it suits your interests.  But the debt to the WY LLC should ideally be created before litigation strikes.  If you, as the debtor, lives in NY, ask your attorney how Section 502 applies to you by owing the Wyoming LLC. 

Ask your attorney about:

New York Consolidated Laws, Limited Liability Company Law - LLC 502. Liability for contributions

a) Except as provided in the operating agreement, a member is obligated to the limited liability company to perform any promise to contribute cash or property or to perform services that is otherwise enforceable in accordance with applicable law, even if he or she is unable to perform because of death, disability or any other reason.  Except as provided in the operating agreement, if a member does not make any required contribution of property or services, he or she is obligated at the option of the limited liability company to contribute cash equal to that portion of the value, as stated in the records of the limited liability company, if so stated, of the contribution that he or she has not made.  The foregoing option shall be in addition to, and not in lieu of, any other rights, including the right to specific performance, that the limited liability company may have against such member under the operating agreement or applicable law.

OUR ROLE

We file the Wyoming LLC and forward the mail from Wyoming directly to you.  We also provide a manager for the Wyoming LLC who doesn't reside in NY.  Our Contract Manager has served for many businesses since 2001 at a reasonable rate.  Please call 484.256.4563 for a consultation.  We work for you, report to you, and your attorney.  We are not attorneys.  We aim to highlight a few questions on what to ask your attorney during your consultation about whether these services are of benefit to you or your business plan.

Your attorney shouldn't serve as a corporate officer for your company.  That's our job to file the company and serve as a Manager, and serve accordingly.  And our Contract Officer/Manager signs a document that he cannot do anything involving the company without your written directive.  Your directives also demonstrate that the company is yours.  We're not interested in being liable for your taxes.  Since the Wyoming LLC is taxed as a partnership, this is a pass-through entity, meaning that the taxes are paid to NY as reported on your 1040 and state tax returns.  There's no tax advantage to a WY LLC.

  • Who appears on the public record for the company?  We provide a Contract Manager that serves on the public record.  You don't appear on the public record, we do.  We provide signed documents that we transferred the company to you.  At all times, you're in control.

  • We serve a registered agent.

  • We forward the mail to you.

  • We exchange photo ID's to keep everyone accountable to one another.

  • We perform a background check of our clients to keep our client pool clean.

  • Who signs contracts and closing documents?  Our Contract Manager will do that for you as long as a personal guarantee is not required.  The Contract Manager can only do this upon your direction and under your control.  We put that in writing.

  • Who signs the tax return?  You do-- the client.

  • Who applies for the Employer Identification Number with a SSN?  You do-- the client.

  • Who is responsible for paying the taxes?  You do-- the client.

  • Who signs on the business account?  You do-- the client.

  • Who is in control?  You're in control-- the client.

  • Who signs as guarantor for the company's liabilities?  You do-- the client.

  • CALL 484.256.4563

 

COSTS:

New Wyoming LLC, $400 for set up.  Includes:

  • Filing of the articles of organization with the Wyoming Secretary of State
  • Aggressive operating agreement to protect the interests of the members.
  • Resolutions that work with the operating agreement. 
  • Filing fee with the Wyoming Secretary of State

Mail forwarding from Wyoming to your address.  $200 per year.

  • 12 mailings per year using our commercial business address in Cheyenne, Wyoming.

Contract Officer service. $500 per year.

  • A Contract Manager is provided who knows the operating agreement and the resolutions of the LLC.
  • The Contract Manager works for you.  A photo ID of the Contract Manager is provided to you.  The client provides a photo ID to the Contract Manager.  This is how we verify the directives of the client.
  • Your Contract Manager serves on the public record for the company.
  • Your Contract Manager is willing to sign documents that don't require a personal guarantee.
  • Your Contract Manager signs closing documents in the selling or acquisition of real estate.
  • Your Contract Manager will also sign the foreign qualification to do business in New York, or another state.
  • You, the client, apply for the Employer Identification Number (EIN) with your Social Security Number (SSN).
  • You, the client, prepare and sign the tax return.  We recommend using Turbotax.
  • You, the client, open and sign on the LLC bank account.  We help you open the account.

Please call 484.256.4563

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