Inside-out vs. outside-in: what your LLC actually protects.

By Tresp, Day & Associates · December 17, 2019

“I have an LLC, so I’m protected” is one of the most common half-truths in asset protection. LLCs do protect, but understanding which direction they protect, and where single-member LLCs fall short, is essential to using them well.

Inside liability

Inside liability arises within the business, a customer slips in your store, a tenant sues over the rental the LLC owns. Here the LLC does its classic job: the claim is generally confined to the LLC’s assets, protecting your personal wealth (as long as formalities are kept and the veil isn’t pierced).

Outside liability, the weak spot

Outside liability is a personal claim against you, a car accident, a personal guarantee. The question becomes: can that creditor seize your ownership interest in the LLC and get at the assets inside? The protection here is the “charging order,” which is supposed to limit a creditor to distributions rather than the assets. But many states give single-member LLCs weak charging-order protection, allowing a creditor to reach the assets inside. This is where owners who think they’re protected often aren’t.

How to fix it

Form in a state with strong charging-order protection even for single-member LLCs (such as Wyoming), consider multi-member structures, and for real wealth own the LLC through an asset protection trust. Tresp, Day & Associates structures entities so they protect in both directions.