What I’ve Learned about Wills, Trusts, and Operating Agreements over the Last 10 Years

As I describe elsewhere, I began my legal career years ago as a bank attorney. I’ve been practicing estate planning and business law for 10 years now. And of course, when I started these new practice areas, I had few if any stories to tell, to share with my clients in hopes of nudging them in the direction they should be nudged.

Not anymore. Today, I have all kinds of war stories of things gone bad and things that could have gone sideways, ending right side up. Let me share three of these stories, two of which revolve around the lack of a paper trail–proper documents–and one of which had the proper documents in place. The first two stories end happily, but not because of proper planning and not without a lot of time and expense. In the last one, good documents saved the day. Before I tell the stories, let me remind you that I practice in Utah, Wyoming, and Michigan. These clients could live in any of these states. I’ll also tell you that I’m going to be as vague as necessary to protect my clients’s privacy. Finally, I could tell each of these stories–with slight variations–about many other clients; in other words, don’t waste your time guessing who’s who. You’ll almost certainly be wrong. And now for the stories:

Do You Have an Operating Agreement?

The first example involves a small business, an LLC with four owners (called “members” in the LLC world). Two were running the business. Two were essentially and–supposedly–silent investors. Those not-so-silent investors suddenly wanted to be bought out and were doing their darndest to make sure the other two wanted to buy them out. By darndest I mean they were fussing about this, complaining about that. Refusing to do something they were supposed to do, demanding that my clients do something that didn’t make any sense.

My clients were ready to see the other two gone. Problem was that the business had no operating agreement–the agreement between the owners that governs, among other things, how a buyout should be conducted, including how the sale price should be determined. Oh, the members–all four of them–had worked on an operating agreement, but one was never signed. The two complaining members knew this and demanded much more for their share of the business than it was worth. And while my clients considered their offer, the two complainers continued to apply pressure to my clients’s pain points.

With no operating agreement and no buy-sell provisions to point to, my clients had nowhere to turn. They couldn’t stand the pain, but neither could they point to an agreement that said, “this is what the buyout price should be.” Thankfully, after much time and money and as the parties were virtually standing on the courthouse steps, they were able to settle. The complainers got more than they deserved but less than they wanted. My clients got a thriving business without two pain-in-the-rear-not-so-silent investors. Everybody’s happy now. But my clients would have been even happier had they been able to say, Yes! to the question of “Do you have an operating agreement?”

You may not have a will, but the state does!

The second case involved a surviving spouse (my client) an ex-spouse (the antagonist in this story) and the lack of a will, a document that would have provided clear directions about who got what when the husband died, among other things. In this case, all we had to go on was my client’s memory of what went to whom and the antagonist’s memories concocted from thin air–in other words, made up–and the state’s laws of intestacy.

Whether or not there’s a will, there will be a probate–unless there’s a trust. In this case, there was no will, no trust, and a need for probate. And because there was no will, meaning no clear directions on what the decedent spouse wanted done with his things, the antagonistic ex-spouse with the make-believe memories (I think she may have been a Michigan fan!) saw an opening, an opening through the courtroom door, and started to make a ruckus. After a back and forth of many court filings, my client finally won out, but not after a lot of legal and court fees, something that absolutely did not have to be–if there had been a will.

Business done right.

Finally, a story with both a happy beginning and a happy (well, kind’a) ending. Once again, my clients were members (owners) of an LLC. This time they had actually taken the time to sit down with an attorney–me–to negotiate, draft, and sign an operating agreement. And then they went to work, turning a new business into a successful business. But then one of them died suddenly and very unexpectedly.

After the funeral, the question became, “what to do with the deceased member’s share of the business?” There was lots of advice from the sidelines.

“Pay the spouse this much.”

“No, that’s way to much!”

Etc. etc. etc.

Fortunately, the back and forth didn’t go on too long. Why? Because of that operating agreement, which had very good provisions governing a buyout in the event of the death of one of the members. The provisions gave great guidance on how to determine the buyout price and how it was to be paid and when. All very cut and dried. In short, good planning prevented bad feelings and saved lots of hassle.

Moral of these three stories? Get your documents in place. Whether it’s an operating agreement for an LLC or a will and trust for an estate, get them done now before the problems begin–because they will.

In the end, I can say this emphatically and without hesitation: The cost of solving business and estate problems without documents far outweighs the cost of preparing the documents in advance. Trust me.

Your LLC: What You Don’t Know About Operating Agreements Can Hurt You

Short story: If you are a member of a multi-member LLC, make sure you and the other owners or members have an operating agreement to protect your interests.

Longer story: It’s complicated.

A lot of truth in the title of this post, a truth many owners of limited liability companies (“LLCs”) are unaware of, particularly those who share ownership with other members. After all, many assume, LLCs are easy peasy to set up: Reserve a name for the LLC, secure an EIN (if necessary), register the LLC with the Secretary of State (in Wyoming) or with the Department of Commerce’s Division of Corporations & Commercial Code (in Utah)–all for peanuts–and you’re off and running, organizational certificate in hand and all the liability protection that represents. Or if you’re short on time, any number of online service providers will do all that for you for a few additional peanuts. In either case, after literally minutes, your newly minted LLC will be ready to go. And you can get back to the real business of selling software or buying real estate or whatever else sits behind the liability shield you just set up.

Well, maybe, but again, maybe not. It depends, as they say.

I know; that’s not a very satisfying answer, but here’s the deal: If your LLC is a single-member LLC, that is, if you are the only owner, then maybe you’ve taken all the steps necessary to the formation of your LLC (more on this in another post). But if you’re just one of two or more members, you still have at least one more very important step to take: You and the other owners (aka “members”) of the LLC almost surely need what’s referred to as an Operating Agreement, an agreement between all the members of the LLC.

The operating agreement does what its name implies. It governs the operations, the daily ins and outs of the LLC, its ups and downs, its beginning and timely (or untimely) end. For example, the operating agreement can control if, when, and how new members can be admitted into the LLC. It can contain provisions that govern who manages the LLC and what powers they have or don’t have. Need power to make all decisions that involve less than $10,000.00? If the operating agreement says you’ve got it, well, you’ve got it. Power to sell the company to a suitor? Not without the consent of all the members, again, if the operating agreement says so. And so on. That’s the stuff an operating agreement is made of.

What? I Already Have an Operating Agreement?

Now it may come as a surprise to you that you already have an operating agreement, at least you do if you organized your LLC in Utah or Wyoming (and virtually every other state). The Limited Liability Company Acts of both states are essentially operating agreements. In fact, both acts say that “to the extent that [your own] operating agreement does not provide for a matter described in . . . this [act]. the [act] governs the matter.” Thus, the LLC Acts of both states are a sort of default operating agreement for those who never get around to having an attorney draft an actual operating agreement.

The target group of both states’s Limited Liability Company Acts was supposed to be small “entrepreneurs who organize their businesses without the benefit of [legal] counsel,” says Donald J. Weidner in his article LLC Default Rules Are Hazardous to Member Liquidity. At least that had been the objective of previous iterations of both Acts. The newest iterations? Not so much–and very much to the detriment of the unwary members of multi-member LLCs (“MMLLCs”).

So long and thanks for all the fish

As Weidner makes clear at the beginning of his article, the newest version of the Acts, versions that Utah and Wyoming enacted said so long to some protections tailored to the target group of small entrepreneurs. Instead, the new version,

(1) declared LLCs to be perpetual entities, and . . . (2) denied dissociated members both the right to dissolve and the right to be bought out. (3) It also took away their easy access to judicial remedies . . . (numbers added)

Let’s put some hypothetical meat on those abstract bones. Suppose you and your two best buddies form an LLC for the sole purpose of purchasing and managing a 4-plex in West Valley City, Utah, or Laramie, Wyoming. And suppose that things go great for a while. Real estate prices soar. Rents increase. Equity builds. But then, things change, at least for you. You and your family moved to another state. Your spouse is diagnosed with cancer. And right now, you’re just not that interested in part ownership of a 4-plex located in another state. You have other things on your mind.

So you ask your buddies to buy you out. Guess what: they have no obligation to do so, at least under the default “operating agreement” provided by the state’s LLC Act. In fact, you may have to wait until your buddies decide it’s time to dissolve the LLC and wind up its affairs–a time that could be years down the road, years after you really needed the money. Remember, that the life of your LLC is perpetual under the state’s LLC Act–unless your operating agreement says otherwise. Unfortunately, you and your buddies never drafted an operating agreement. In short, you’re kind of stuck.

Now, you’re not without any remedies. You might be able to sell your interest to an outside party. Of course, the person would have to buy knowing that she is buying only the rights to any distributions from the LLC and not necessarily for any voting rights or management rights. Good luck selling that.

You might also sue to force the dissolution of the LLC (thereby triggering distribution of your capital contribution) by proving that your buddies are “acting in a manner that is oppressive.” That, too, is a long shot unless they really are twisting the knife and not just exercising good business judgment under the circumstances. But if they’re simply not agreeing to buy you out because such a buyout would be a financial burden to them or the company, then oppression will be hard to prove.

So pick up the darn dollars.

There’s an old saying, don’t step over dollars to pick up dimes. Going bare, that is, setting up a multi-member LLC without an operating agreement that provides more flexible liquidity rights is picking up pennies. Just know that if you choose that route, down the road, you may find yourself battling for dollars with your former buddies because they don’t want to buy you out.

A well-drafted operating agreement can limit the life of the LLC if appropriate; it can provide for buyouts in the event of death, disability, or myriad other reasons; it can provide for judicial remedies not allowed under the default “operating agreement.” In fact, the operating can cover all kinds of bases, all sorts of contingencies that the state’s default agreement doesn’t even begin to address. In other words, a well-drafted operating agreement is a must have for multi-member LLCs.

And now you know how to avoid a world of hurt.

A Limited Liability Company to Hold Real Estate? Something to Think About

For individuals who own real estate, it is important to consider the best way to structure ownership of various properties. If you‘re just starting out as a real estate investor, you may hold title personally, but that may not be the most advantageous method of ownership. An option investors choose is to form a limited liability company (LLC)—or even a series LLC—to hold the real estate instead. You form such an entity through the Wyoming Secretary of State or the Utah Division of Corporations, depending on where you live.

As with any big decision, there are myriad items to think about when deciding between owning investment real estate personally or in an LLC. Here are a few:  

  1. Liability. As the name implies, limited liability companies provide liability protection to their members (i.e., owners). LLCs allow you to separate your personal assets from your business assets. In doing so, the LLC separates the liability to which each set of assets may be subject. This separation means that if real estate owned by your LLC is at risk from litigation or creditors’ claims involving the LLC, your personal assets should not be at risk. There are limited exceptions to this rule. For example, if you did something negligent or intentionally wrong that led to litigation, even during the course of the LLC’s business, you may be personally liable. However, compliance with your state’s rules and careful steps aimed at distinguishing your personal property from that owned by your business will allow the LLC to provide greater protection against personal liability.
  • Taxes. Another factor you should consider is the tax impact of creating an LLC. Single-member and multimember LLCs that hold real estate can enjoy the benefit of pass-through taxation. In some cases, the transfer of your real estate into an LLC may not have a significant immediate effect. However, depending on how many owners your LLC has, whether you have a mortgage and how much (if anything) you owe on it,  and the value of the property, you may have significant tax issues to consider.
  • Privacy. Creating an LLC may provide greater opportunities to keep information about what you own private. This increased ability to keep your identity as an owner private varies by state. Different jurisdictions have different rules regarding how much disclosure is required to form and maintain an LLC. Popular states for LLC formation like Delaware and Wyoming allow for anonymity. As a result, you may be able to structure your business ownership so that the public at large does not have knowledge about what you own. This can be a helpful asset protection strategy if you could ever be involved in litigation or if any of your properties are exposed to risk. Opposing parties will not be able to discover properties or business interests held in your LLC to pursue in their lawsuits. In states whose LLC statutes do not offer as much opportunity for privacy, you may explore creative ways to increase your LLC’s privacy. However, they are not likely to provide as much privacy as the statutory anonymity provided in certain LLC-friendly states.
  • Tailor-made terms of ownership. Finally, one of the most significant benefits of the LLC is the opportunity to tailor the structure of your business. This means that you can define how you will split profits and losses in the real estate and how decisions will be made. These are two examples of ways you can enjoy the flexibility provided by an LLC, but there are many more. Some people create multiple entities, with one LLC focused on the management of the real estate while the other LLC or subsidiary LLC owns the assets. From determining your LLC’s tax structure to deciding whether to have annual meetings, you can design the company’s structure so that it will function in a way that makes sense for the specific assets it owns..

The LLC provides a host of options for individuals interested in maximizing their protection against personal liability and determining effective tax, ownership, and management plans.

I Can Help

If you would like to explore these or other ideas further, schedule a virtual meeting with me by clicking on the red button in the lower right-hand corner of this webpage for a free consultation.

How Are LLCs Taxed?

Limited liability companies (LLCs) are one of the most popular types of business entities. What they are not is a tax classification. In fact, an LLC’s flexible taxation options are one reason it is the preferred choice of enity; LLC members can, for the most part, choose how they would like to be taxed. The LLC enjoys this flexibility because the Internal Revenue Service does not recognize it as a distinct entity for federal tax purposes. It must, therefore, be taxed as one of the four taxable options already available:

  1. Disregarded Entity. A disregarded entity is a business structure that is not recognized as distinct from its owner for tax purposes. If you are the sole owner of a single-member LLC, the IRS classifies your company as a disregarded entity by default and taxes the LLC as a sole proprietorship. As a result, the owner of a single-member LLC must report the LLC’s income and expenses on the member’s Form 1040 Schedule C. A separate tax return for the entity is not required. 
  1. Partnership. When an LLC has multiple members, the IRS’s default classification for tax purposes is the partnership. Partnerships, like disregarded entities, pass their income and expenses down to their owners, and LLC members are responsible for paying taxes proportionate to their ownership interests. Income, credits, and deductions are reported to the IRS using Schedule K-1 (Form 1065). 
  1. Corporation. If the member or members of an LLC don’t want it to be taxed as either a sole proprietorship or a partnership, they can elect to have it taxed as a corporation by timely filing Form 8832. Electing taxation as a corporation may be beneficial in several ways. If the company does not intend to pay out dividends, electing to file taxes as a corporation allows LLC members to avoid reporting the business’s income on their personal income tax returns. Because personal income tax rates are often higher than corporate income tax rates, this may allow individuals to benefit from the lower corporate income tax rate. Additionally, LLC members may avoid paying self-employment taxes. Thus, corporate taxation may have money-saving benefits for LLC members.
  1. S Corporation. The S corporation tax election is unique. Unlike the other three options described above, the S corporation is not a different entity type. Rather, it is a corporation that meets all of the following criteria:
  • it has less than 100 owners
  • all of its owners are United States citizens or residents
  • it has only one class of membership
  • its membership is not comprised of any partnerships, corporations, or non-resident aliens

If members choose to have their LLC taxed as an S corporation, the LLC members enjoy pass-through taxation unlike a standard corporation. Moreover, the income that is taxed as a distribution is not subject to self-employment tax. Finally, an S corporation allows its owners to take advantage of the Qualified Business Income Deduction of up to 20 percent. There are some limitations as to which industries qualify for this unique deduction. You must timely file IRS Form 2553 to elect S corporation taxation.

We Can Help

Choosing the right structure for your business can be challenging and involves all kinds of considerations in addition to how the LLC should be taxed. Be careful you don’t willy nilly allow the IRS tail to wag the LLC dog. Have a conversation or two with your attorney and your CPA (you do have a CPA, don’t you?), then make the tax decision.

Your LLC Up and Running in 6 Steps

One of the first decisions to make when starting a business is what type of business entity to form. The limited liability company (LLC) is one of the most popular business structures because it offers a level of flexibility and legal protection that is attractive to many people who are starting their own businesses. The following six steps will help you get started if you are interested in forming an LLC.

  1. Choose a name. To form an LLC, you must select a business name that complies with state regulations. The name you select cannot be the same as or even too similar to any other LLC’s name; it must be unique to avoid consumer confusion. Next, states often require that the name of your LLC include one of the following at the end: “limited liability company,” “LLC,” or “Limited.” This requirement gives the public notice of your business structure. As simplistic as this step may seem, it is critical to successfully establishing an LLC and being able to take advantage of the legal protections this business structure provides.
  2. Select a registered agent. In addition to selecting an appropriate name, you must select a registered agent. A registered agent, also known as a statutory agent, is the party appointed to receive service of process and communication from your state’s secretary of state. If you live in the state where you form your LLC, you may be your own registered agent. Registered agents must provide an address where important correspondence can be sent. Typically, post office boxes are not acceptable places for a registered agent to receive these communications—rather, a physical address is usually required so the agent can receive service of process. When deciding who should serve as the registered agent, keep in mind that the registered agent will typically be the first person to whom the state reaches out if any issues arise with your LLC. As a result, it is important to ensure that your registered agent consistently checks incoming correspondence and relays that information to you as the business owner. If you are not interested in being your own registered agent, consider using one or more commercial registered agents in your state to do the job. Generally, they perform their services fairly inexpensively.
  3. File documents. Perhaps the most important step in creating your LLC is filing the required documents. The articles of organization (referred to in some states as the certificate of formation or certificate of organization) are usually filed with the secretary of state and include such information as the company’s name, the registered agent’s name and address, and the business’s purpose. This information becomes public record, so be mindful of what information you are comfortable sharing with the world. Keep in mind that there is a fee to file these documents; however, any start-up costs and filing fees you incur are tax-deductible. 
  4. Get a tax identification number. Another essential step in starting an LLC is obtaining a Tax Identification Number. Your LLC’s Tax Identification Number, also known as an Employer Identification Number or EIN, is provided by the Internal Revenue Service (IRS). After completing a successful application, the IRS assigns a unique number that links the identity of the responsible party to the business for income tax purposes. 
  5. Open a business bank account. After you have filed your LLC’s formation documents with the state and obtained a Tax Identification Number, you will be ready to open a business checking account. This step must not be overlooked in order to enjoy the benefits of an LLC. Maintaining this separate business checking account prevents you from commingling your personal funds with the business’s funds. Failure to maintain this separate business account could result in losing the business’s limited liability status because of a legal concept called “piercing the veil.” If this happens, you could be held personally liable for the LLC’s debts and liabilities.
  6. Draft an operating agreement. Finally, to form an LLC, you must create an operating agreement. This document outlines the rules and regulations governing the LLC. Think of it as a contract or agreement between you and the other members of the LLC or between you and the LLC if you form a single-member LLC. In some states, business owners are required to file this document with the articles of organization. 

Once your LLC is formed, it is critical to remember and adhere to the compliance requirements to keep your LLC in good standing. These requirements vary by state but often involve some form of annual reporting. In most states, for example, Utah and Wyoming, you may also be required to pay an annual fee. Failure to comply with these requirements will result in the suspension of your LLC and put your personal assets at risk.

The Impact of Transferring a Property in or out of an LLC on the Underlying Mortgage

The purpose of the Garn-St. Germaine Depository Institutions Act of 1982 is the “permanent preemption of state prohibitions on the exercise of due-on-sale clauses by all lenders, whether federally or state-chartered, [and] to reaffirm the authority of Federal savings associations to enforce due-on-sale clauses, and to confer on other lenders generally comparable authority with respect to the exercise of such clauses.”

That said, the Act contains some limitations on that authority:

§ 591.5  Limitation on exercise of due-on-sale clauses.

(a)  General.  Except as provided in § 591.4(c) and (d)(4) of this part, due-on-sale practices of Federal savings associations and other lenders shall be governed exclusively by the Office’s regulations, in preemption of and without regard to any limitations imposed by state law on either their inclusion or exercise including, without limitation, state law prohibitions against restraints on alienation, prohibitions against penalties and forfeitures, equitable restrictions and state law dealing with equitable transfers.

(b)  Specific limitations.  With respect to any loan on the security of a home occupied or to be occupied by the borrower,

(1)  A lender shall not (except with regard to a reverse mortgage) exercise its option pursuant to a due-on-sale clause upon:

(i)  The creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property: Provided, That such lien or encumbrance is not created pursuant to a contract for deed;

(ii)  The creation of a purchase-money security interest for household appliances;

(iii)  A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;

(iv)  The granting of a leasehold interest which has a term of three years or less and which does not contain an option to purchase (that is, either a lease of more than three years or a lease with an option to purchase will allow the exercise of a due-on-sale clause);

(v)  A transfer, in which the transferee is a person who occupies or will occupy the property, which is:

(A)  A transfer to a relative resulting from the death of the borrower;

(B)  A transfer where the spouse or child(ren) becomes an owner of the property; or

(C)  A transfer resulting from a decree of dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement by which the spouse becomes an owner of the property; or

(vi)  A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and occupant of the property, unless, as a condition precedent to such transfer, the borrower refuses to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy. (Emphasis supplied)

A cursory reading of this statute will demonstrate that though transfers to inter vivos trusts are exempted from the due-on-sale provisions of Garn-St. Germain, for example, transfers to LLCs are not. Thus, if your clients deeds her personally own, mortgage-encumbered rental property into her single-member LLC (SMLLC) of which she is the sole member, she risks her mortgage lender calling the loan—that is, the loan being immediately due and payable.

What to do? Interestingly, different attorneys give different advice. Some will say that the safest path is to call the mortgage lender and let them know what is going on—essentially ask permission. They’ll then say, “but why bother? The lender will never find out anyway.” Actually, it may be true that lenders don’t spend much time policing property records in an effort to catch borrowers transferring real estate into their LLCs—I’ve heard this a lot, but who knows if it’s true? However, the safest path is also the best path, and in most cases, it will be a relatively easy one. But when you make that call, make sure you keep talking until you talk to a person who knows what they’re doing.

The due-on-sale concern will arise in two situations: 1. In a new purchase where the lender says the purchaser/borrower must buy the property in her own name, and the purchaser/borrower intends to transfer it into an LLC post purchase; and 2. Where the purchaser/borrower has owned the property in his own name for a while and decides he wants to transfer it into an LLC—the old purchase.

New Purchases. In this situation, it’s simply a matter of being up front with the lender from the beginning. The borrower should explain their intentions and get the lender’s approval in writing prior to signing the loan, when she has leverage. Lenders see these situations all the time, and most will agree and even facilitate the transaction. Some may require guarantees by the LLC, signed by its members or managers accompanied by a resolution or other statement of authority evidencing their authority to sign.

Old Purchases. This situation is more problematic. The lender has the leverage, and if rates are up, it’s in the lender’s interest to call the loan. In such an environment, it may be worth the risk to transfer to the LLC and ask forgiveness later—if ever. Chances are, the lender will never know. But if the lender discovers that your client transferred the property and if rates are up and the client’s financial situation has deteriorated, trouble may ensue. If rates haven’t changed much and if the client is able to refinance if necessary, the existing lender may be more willing to allow the transfer without calling the loan.

It’s virtually always best to talk to your lender before you make a transfer; otherwise, you risk the lender calling your loan. And besides, do you want a good or a bad relationship with your lender. Yeah, I thought so.

More than Just the Tetons: A New Chancery Court Makes Wyoming Well Worth Discovering

Geyser Basin, Yellowstone Park, Wyoming (like the title says, more than the Tetons)

But for the missing photo of the magnificent Tetons, volume 11, number 1 of the 2011 Wyoming Law Review might be mistaken for a sales piece published by the Wyoming Business Council—the state’s economic development agency. Two articles in the journal tout Wyoming’s business and trust friendly laws. “The Undiscovered Country: Wyoming’s Emergence as a Leading Trust Situs Jurisdiction,”[1] Christopher Reimer argues that the state’s laws on directed trusts, trust protectors, self-settled trusts, and private trust companies, among other tools justify that claim. A few pages earlier, Dale Cottam and four others make similar claims with regard to limited liability companies. Not only did the new 2010 Limited Liability Company Act (“LLC Act”) replace Wyoming’s original—and first-in-the-nation—act, they point out, it included some “home cooking” that makes the Cowboy State the place to be . . . organized.[2] Come for the Tetons; stay for the business and trust friendly laws and the lack of a state income tax.

Seven years later, Amy Staehr revisited that theme in her piece “The Discovered Country: Wyoming’s Primacy as a Trust Situs Jurisdiction.”[3] In it, she updates what Wyoming’s part-time legislature had been up to in the intervening years. Among other things, new legislation provided more privacy protection to trusts and better asset protection with a new Wyoming Qualified Spendthrift Trust. Likewise, limited liability companies could now have a more flexible management structure. The message was again clear: Yes, the vistas are expansive and the sunsets beautiful, but have you looked at our business and trust friendly laws lately? “I think it’s exciting what Wyoming’s trying to do with its laws,” says Michael Greear, a state representative and member of the state’s Chancery Court Committee. “Anything we do to get more business and still keep the population at 500,000 is all good.”

But there was a hitch: Wyoming’s court system. It had essentially two tiers: Nine District Courts of general jurisdiction and a Supreme Court, the state’s only appellate court. And only the Supreme Court reported its cases online. In 2019 it issued 151 opinions, just 3 of them involving trusts and businesses, down from the 159 it heard in 2018, again, only 3 of them dealing with trusts and businesses. In short, Wyoming had great new business and trust laws, but too few court opinions published online to help interested observers discern how Wyoming courts might interpret those laws, an essential ingredient to a stable climate for business entities and trusts.

It didn’t help that recently—and unfortunately—the Court’s 2014 GreenHunter Energy case put the fear of creditors into the hearts of businessmen and women. The case’s result was certainly just, but the rule of the case appeared to ignore new veil piercing provisions in the LLC Act. It’s worth noting that the Wyoming legislature did its part to provide stability. Almost immediately after the Court issued its opinion, the legislature amended the LLC Act to essentially reset the law clearly and unequivocally to pre-GreenHunter days.[4]

In its 2019 session, the Wyoming Legislature acted again, this time to increase the size and density of the paper trail created by Wyoming courts in hopes of becoming the Delaware of the West. Delaware has a Chancery court, its docket devoted to trusts and business; so should Wyoming. And voila! After a concerted effort by some forward-thinking legislators and a stroke of the Governor’s pen, Wyoming has a Chancery Court dedicated to hearing nothing but trust and business cases.  Senate File 0104, the bill that started it all, now sits ensconced as Chapter 13 of Title 5 of the Wyoming Code. Where the court will sit and when it will open is another matter. “Two things will dictate when the factory is up and running: the adoption of court rules and making sure we’ve got the IT—the caseload management system and e-filing—in place,” says Senate President Drew Perkins, sponsor of the bill.

The Act mandates $1,500,000.00 of initial funding for the court and contains a broad outline for how the court should operate, among other things. In April 2019, the Supreme Court issued an order establishing the Chancery Court Committee to fill in the details of that outline. Justice Kate Fox was appointed its chairperson. “She gets two thumbs up,” Greear says. “She put together a great committee.”

The Committee did its job, particularly in developing court rules. Finally on January 7, 2020, an email went out to the Wyoming Bar, asking for comments on the proposed rules. The comment period ends on May 15, 2020, and final rules will go into effect six months later on November 15, 2020. That date makes sense because there is still a lot to work through, according to Justice Fox. That includes the rules, but also who the judges will be and where their court will sit. “The plan is to appoint judges with expertise in the statutory areas, much like in Delaware. Wyoming Chancery Court judges must be experienced or knowledgeable in the subject matter jurisdiction of the court,” she explains.

The court’s jurisdiction includes everything from breach of contract to fraud and misrepresentation, from statutory violations of laws governing asset sales and protecting trade secrets to transactions involving the Uniform Commercial Code and the Uniform Trust Code. Disputes concerning employment agreements, insurance coverage, and dissolution of corporations, LLCs, and other entities can all be heard by the Chancery Court. The statute says the Court “shall employ “alternative nonjury trials, dispute resolution methods and limited motion practice and shall have broad authority to shape and expedite discovery,” [5] a good idea, given that the new law requires “effective and expeditious resolution of disputes,” a term of art that means a majority of the actions filed in the court must be resolved with 150 days of filing. “The sponsors of the bill view the Chancery Court as kind of a business draw,” Fox says. “A speedier court with more particular [business and trust] expertise should be attractive to businesses who are considering incorporating in or coming to Wyoming.”

As for where the court will sit, “it will likely be in Casper or Cheyenne, just because they are bigger,” she continues. “But it’s also possible, depending on the case and where the parties are, that the judges could be mobile and hear cases in places like Jackson.”

The smart money is on Casper. It’s centrally located, new money was recently appropriated for a new state office building there, and it has good air service. “Last week I had meetings in New York with our investment bankers,” says Greear, who lives in Worland, Wyoming, where he’s the CEO of Wyoming Sugar Company. “I flew out of Casper, had a nice dinner in New York, met with my bankers and was home the next day. United and Delta service Casper really well.”

Perkins, who lives and works in Casper, hopes there will eventually be one or more courts outside of his hometown, maybe one in Cody or Sheridan and one in Cheyenne, for example. “That’s my vision for it, anyway. The idea is not about having the court in Casper; it’s about having the court available for quick resolution.”

As they say, time will tell. The job now is to get the first court up and running with a judge knowledgeable about business and trust law expeditiously issuing opinions. The hope is that, when published, those opinions will consistently and clearly demonstrate how things are done in the Wyoming. And done right, it’s all good—for the Equality State and the businesses that locate there.

[UPDATE] After this story went to press at the ABA, the Wyoming legislature failed to fund a variety of construction projects during the recent legislative session, including the construction of the Chancery Court in Casper. With the COVID-19 pandemic and the drop in oil prices, even Drew Perkins, a sponsor of the Chancery Court, thought it good to wait and watch.


[1] Pg. 165 (2011).

[2] “The 2010 Wyoming Limited Liability Company Act: A Uniform Recipe with Wyoming ‘Home Cooking,” pg. 49 (2011).

[3] Wyoming Law Review, Volume 18, Number 2, pg. 283.

[4] See “Wyoming Supreme Court Upholds Decision to Pierce the Veil of Single-Member LLC,” Rutledge, Thomas; November 13, 2014, https://kentuckybusinessentitylaw.blogspot.com/2014/11/wyoming-supreme-court-upholds-decision.html (accessed 2/26/2020); and “Wyoming Cleans up Veil Piercing in LLC Act,” Fershee, Joshua; March 29, 2016, https://lawprofessors.typepad.com/business_law/2016/03/wyoming-cleans-up-veil-piercing-in-llc-act.html (accessed 2/26/2020).

[5] Wyo. Stat. § 5-13-111

I wrote the piece above for the April, 2020 issue of The LLC & Partnership Reporter, a publication of the ABA.

DIY Investment Management of Retirement Assets: Is There an LLC in Your Self-Directed IRA’s Future?

An idea worth considering.

As baby boomers begin to retire, the burden of making management decisions regarding their retirement assets may seem daunting. This is especially true for those who choose to forego using professional investment advisors and instead manage their assets by themselves. If DIY appeals to you, just know there are many pros and probably as many cons.

 First, the pros of choosing to manage your own retirement funds, particularly if you are a business owner with expertise in the area in which you invest. By doing it yourself, you can:

  • Exercise greater control over investment choices,
  • Enjoy greater flexibility in allocating and diversifying these investments, and
  • Avoid high fees associated with having a financial advisor.

If you choose to pursue the DIY method, a reasonable option for you to explore is the self-directed Individual Retirement Account (IRA). A self-directed IRA is like other retirement accounts that allow individuals to save for retirement. A self-directed IRA can take the form of any of the more common ROTH, SEP, and traditional IRAs, allowing your investments to enjoy benefits like tax-free growth or specified tax-deferment. The self-directed IRA’s unique attribute relates to the types of investments that are permitted. Unlike standard IRAs, a self-directed IRA extends beyond mutual funds and stocks. With a self-directed IRA, a custodian can also invest in real estate, private company stock, precious metals, and all other investments available by law.

(Some investors have taken the self-directed IRA a step further and set up what is referred to an “IRA/LLC” or “checkbook control IRA,” an arrangement by which investors may directly manage their IRA investments through an LLC owned 100% by a self-directed IRA. This arrangement is beyond the scope of this short blog post, but since it’s an option worth considering, it’s one worth mentioning.)

Pros inevitably are accompanied by cons. Self-directed IRAs are no exception. In fact, there are considerable risks and other considerations, you should take into account:

  • Clarity of Goals. One significant limitation for individuals attempting to manage their own retirement accounts is that they haven’t given serious thought to their financial goals, let alone their retirement plans. To successfully manage retirement assets, you must understand exactly what you are trying to achieve and strategically align your investments with those goals. Failure to do so may result in inadequate savings or over-spending. Both mistakes can lead to complications once you retire.
  • Understanding of Financial Concepts. In addition to having a clear vision for your financial future, you must understand basic financial concepts associated with investing. For example, anyone interested in managing their retirement funds should be able to develop an asset allocation strategy that incorporates factors like tax rates, age of retirement, required income, and current assets. Without a solid understanding of how these various factors influence each other, you could under-save and outlive your retirement funds.
  • Compliance with complex investment rules. Understanding your goals and navigating complex financial concepts will not matter if you violate one of the many rules associated with investments. The federal government has a variety of regulations that govern the types of permitted transactions, who can be a party to such transactions, and the extent to which various taxes apply. For example, in a self-directed IRA, clearly defined rules prohibit certain transactions characterized as self-dealing. To that end, your self-directed IRA is not allowed to engage in transactions with certain people, including the account owner, family members, and business partners. What constitutes self-dealing is defined by the Internal Revenue Service and case law. Figuring out which transactions are allowed is tricky, and failure to comply with IRS rules can result in hefty fines.

In short, going DIY? Be careful out there. Better, don’t DIY in every aspect of managing your retirement funds. Be honest with yourself: Seek advice where you lack knowledge.

Series LLCs: (Some of) What You Need to Know

A series LLC, a relatively recently authorized form of LLC, is composed of a master LLC—the Mother Ship—which houses a series of LLCs. Each series, silo, or cell (the potential synonyms are almost endless) within the series LLC often has separate owners, and each must always maintain separate records, especially records that account only for the assets of that series—at least if the series LLC is formed in Utah or Wyoming and other ULLCA states that allow for series LLCs.

Series, Silos, or Cells: more protection at less cost?

Similar to a corporate/subsidiaries business model and like their more well-known parent LLCs, series LLCs offer asset-protection benefits, but they avoid the complexities of corporate taxes, structure, and other required formalities. 

This type of entity is well suited for certain businesses that may benefit from its relative simplicity, reduced costs, and increased asset protection. But especially because they are so new, there are also some uncertainties associated with the series LLC.

Potential Benefits of the Series LLC:

1. Simplicity

  • Reduced Administration

Although each series must be administered separately, series LLCs have the potential to save time and administration costs.

2. Reduced Costs

  • One Registration

Each of the individual series is formed and governed by the master LLC’s operating agreement.  In most states—Wyoming and Utah, included—only the master LLC must be registered with the state, which means reduced fees.

  • Potential Sales Tax Savings

Some states may not require sales tax to be paid on rent that one series pays to another series.

3. Asset Protection

  • Mixed Signals

Under most series LLC statutes, each series is protected from judgments against assets in other series under the master LLC.  But it’s not clear that this protection will be respected in bankruptcy proceedings or in states that don’t recognize series LLCs.

Potential Downsides of the Series LLC:

1.  Some Additional Costs

  • Registered Agent

Many states require a separate registered agent for each series in the series LLC, which may mean additional expenses.

  • Formation Cost

The up-front registration fee for a series LLC may be higher than the registration fee of a regular LLC.  In some states, it may be less expensive to register multiple single-member LLCs rather than a series LLC with multiple series. This is generally not the case in Wyoming and Utah.

2. Governance Issues

  • Overlap Jeopardy

The operations may not be as streamlined as anticipated. The records of each series must be maintained separately, and each series must have its own separate bank accounts.  Can administrative functions among the series overlap without jeopardizing the limited liability? Can the ownership or management overlap? Does inadequate capitalization of one series impact the other series in the series LLC? At this point, these types of questions remain unanswered.

3. Liability Questions

  • Bankruptcy Issues

Federal bankruptcy laws do not yet address series LLC issues.  Can an

individual series within a series LLC file for bankruptcy? Are the assets of the non-filing series and the master LLC protected from the filing series?  At this time, there are no clear answers to these and other bankruptcy-related questions.

  • Choice-of-Law Issues

If a series LLC gets sued by a third party in a state that doesn’t authorize series LLCs, the assets of each series and the master LLC may be at risk. For LLCs that operate in states with and without series LLC statutes, this may make a series LLCs much less attractive.

The series LLC is potentially a star on the rise and is definitely worth watching.  If your business is particularly well suited to this compartmentalized approach—real estate investing, for example—and you live in one of the states[1] that currently authorizes series LLCs, you may want to this novel entity.


[1] As of November 2019, Alabama, Delaware, DC, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah Wisconsin, Wyoming, and Puerto Rico provide for series LLCs in their statutues.

Transferring LLC Membership Interests Part 3—Involuntary Transfers

An involuntary transfer of an LLC membership interest is just that—a transfer prompted by a creditor action or the occurrence of a triggering event outside of the member’s control. An individual or entity obtaining a membership interest as a result of an involuntary transfer usually cannot fully step into the shoes of the transferring member.

This statutory protection—often called a pick your partner provision—acts as a safeguard that provides LLC members with a certain amount of personal asset protection. For example, whereas the creditor of a corporate shareholder could reach and exercise shareholder rights to their full extent, the creditor of an LLC member can reach and exercise only the economic rights associated with membership interests—not the voting or management rights. The recipient of this type of membership interest is called an assignee.

Statutory Provisions – Creditor Action

If an LLC does not specify any transfer provisions, creditor actions are subject to state LLC laws. Each state, in its LLC statute, has provisions limiting what actions a creditor can take against an LLC member for personal debt. Depending on the state, the statutory remedies available to an LLC member’s personal creditors may include:

  • A charging order, which is a court order requiring the LLC to pay all the distributions due to the member-debtor from the LLC to the creditor.
  • A foreclosure on the member-debtor’s LLC ownership interest.
  • A court order to dissolve the LLC.

These remedies protect the other LLC members from the risk of having the creditor of a debtor-member step into the debtor-member’s place and share in the control of the LLC. To a varying degree, they also address the creditor’s right to satisfaction of the debt.

Transfer Provisions – Other Triggering Events

Transfer provisions are typically specified in the LLC’s operating agreement or in a separate buy-sell agreement. There may be some overlap with creditor actions, as these are often included as triggering events in the transfer provisions.

Examples of triggering events that can be specified in an LLC’s transfer provisions include the following:

  • A deceased member’s membership interest passes to a prohibited individual or entity
  • A member’s bankruptcy or other involuntary transfer of a membership interest to the member’s creditors
  • A member’s separation or divorce, or the transfer to a member’s spouse under property division or under a divorce or separation decree
  • A member’s membership interest becomes subject to a valid court order, levy, or other transfer that the LLC is required by law to recognize
  • A member’s breach of the LLC’s confidentiality
  • A member’s failure to comply with any mandatory provision of the operating agreement
  • A member’s failure to maintain a license or other qualification that disqualifies the member from engaging in the LLC’s primary business

If a triggering event occurs, the transfer provisions may prompt a mandatory redemption of the member’s membership interest or a right of first refusal to the LLC or to the other members. If an involuntary transfer does occur, the recipient of the membership interest—the assignee—typically receives only an economic interest in the LLC with no management or voting rights.

The Wyoming State Bar does not certify any lawyer as a specialist or expert. Anyone considering a lawyer should independently investigate the lawyer’s credentials and ability, and not rely upon advertisements or self-proclaimed expertise. This website is an advertisement.