You want the best protection possible for your assets. You want to use the strongest entity available. But if you live in a weak asset protection state (like California) and set up your LLCs in a strong state (such as Wyoming), which state law applies?
Unfortunately, the old standard lawyer answer applies here: It depends. If you live in California and hold your Wyoming LLC membership interest (your certificate representing ownership) in California, that certificate is your personal property in California. Your Wyoming LLC can then be subject to the jurisdiction of a California court. In such a case, California’s weaker laws will apply. However, with some careful planning and by actually holding the physical Wyoming LLC certificates in Wyoming, the stronger asset protection of Wyoming law can apply. (Please note that we will use California and Wyoming in our discussion but any weak state/strong state scenario applies.)
A membership interest in an LLC may be held in two ways:
1| As an uncertificated security; or
2| As a certificated security.
A certificated security is a declared ownership interest (like a corporation’s stock certificate) represented by a properly prepared and held certificate. An uncertificated security is an ownership that is not represented by a properly prepared certificate. See, UCC 8-102(4), (18).
Most membership interests in LLCs are held as uncertificated securities. Indeed, a membership interest in an LLC is not a security, unless its terms expressly so provide. See, UCC 8-103(c). Courts usually consider uncertificated securities to be “general intangibles” and see the LLC ownership as accompanying the owner of the uncertificated security. If a court in California has personal jurisdiction over a judgment debtor (someone who lost in court and for purposes of example we will call “Bob”), then the court in California also may have in rem (property) jurisdiction over Bob’s Wyoming LLC even though he formed it in Wyoming because it is “intangible personal property” and therefore accompanies him to California, a state with weak laws. Let’s consider a better alternative.
There are distinct advantages to holding a membership interest in an LLC as a certificated security. First, Bob’s interest in a certificated security may be reached by a judgment creditor only by actual seizure of the security certificate by the officer making the attachment or levy. See, UCC 8-112(a). Placing them in a Wyoming safety deposit box, a service Corporate Direct provides, puts the certificates out of easy reach of any other state court. Furthermore, local law (that of Wyoming, here) governs filings of adverse claims (against Bob or you). See, UCC 8-301(a)(1). If Bob acquires possession of a security certificate in Wyoming, delivery of the security certificate occurs in Wyoming and state laws govern whether an adverse claim can be asserted against Bob. Per those laws, if Bob is served with process in California, the court can only apply laws that also apply in Wyoming. For example, if a charging order against Bob’s LLC membership interest is the exclusive remedy in Wyoming, which is the California court’s only option.
Corporate Direct has developed a method for certificating LLC securities in Wyoming to be governed by Article 8 of the UCC so that Wyoming law applies. We call it “Armor8.” Corporate Direct adds specific jurisdictional Article 8 language to the Operating Agreement and the membership certificates. They hold the membership certificates in a safe deposit box at a Wyoming bank. Your certificates are physically located in Wyoming and governed by Wyoming law.
There has not been a case challenging this procedure and there are no guarantees as to how any one court would rule. By taking the extra steps, you are in a much better position for greater protection. Armor8 service is very affordable.
The setup fee is $95, and the annual holding fee for 1 to 7 certificates is $75. To get your certificate out of the Wyoming safe deposit box and returned to you (for reissue or any other reason) the fee is $50. To place the certificates back in the safe deposit box the fee is also $50. There is no additional cost to have “Article 8” language included in your new Wyoming LLC’s operating agreement and membership certificate if you are already using the certificate service. You can also amend and protect your existing certificates for a minimum fee of $295. Prices may be higher due to the complexity of the Operating Agreement and the number of certificates to be reissued. Now you can better protect your LLC by keeping ownership certificates in Wyoming. Call Corporate Direct at 1-800-600-1760 or visit www.CorporateDirect.com to get started.
This sponsored content can be found in the Investor Review section of the December 2017 Think Realty Magazine .