Question: I’m a New Hampshire resident. I have several hundred thousands of dollars’ worth of assets that I’ve accumulated over the years that I don’t use in my business. They include vehicles, stocks and bonds, paintings, and Persian rugs and other valuable home furnishings.
Should I put these assets in a New Hampshire LLC to provide them with asset protection in case a third party ever sues me and makes a claim that exceeds my insurance? Should I put them in an asset protection corporation? Or should I just hold them in my own name and not transfer them into any entity? And if I do form an asset protection LLC, should it be a Nevada LLC or a New Hampshire LLC? I’ve read that Nevada is the best jurisdiction for asset protection LLCs and corporations.
Answer: The short answer to your question whether to form a New Hampshire LLC for asset protection is yes. But, as I’ll explain below, the matter is complex.
The main reason you should consider forming a New Hampshire asset protection LLC is that, in addition to providing a statutory liability shield under Section 23, the New Hampshire LLC Act, like other U.S. LLC acts, provides a specialized form of statutory asset protection called “charging orders.” The charging order provision of the New Hampshire LLC Act is section 126.
Section 126 provides, in essence, that if a creditor has an unsatisfied judgment against a debtor who is a member of a New Hampshire LLC, the creditor can’t get a court order transferring the debtor’s LLC membership to the creditor in satisfaction of the debt even if the debtor holds most or all of her assets in her LLC. Rather, all the creditor can get is an order by the court (a “charging order”) requiring that any LLC distributions of cash or other assets that would normally go to the debtor must go instead to the creditor to the extent of the unsatisfied debt plus interest. Because of Section 126, creditors may decide not to sue their debtors’ LLCs at all, or they may make debt compromises they would never otherwise consider.
However, before you decide to form an asset protection LLC, you should be aware of the following considerations:
— If you form an LLC as an asset protection LLC, it should be a multi-member LLC, not a single-member LLC, because under Section 126, charging order protections are substantially stronger for multi-member LLCs than for single-member LLCs. And, as I’ve written previously in this column, even apart from charging-order considerations, multi-member LLCs offer better asset protection than single-member LLCs.
— A spouse is often the ideal co-member of a New Hampshire asset protection LLC.
— As I’ve also written in this column, every LLC, whether it is a single-member LLC or a multi-member LLC, should have a well-planned and well-drafted operating agreement. These agreements can be expensive, but they are particularly important for members of asset protection LLCs. A competent New Hampshire LLC lawyer is likely to charge $750 or more for a single-member LLC operating agreement and $1,500 or more for a multi-member LLC operating agreement.
— In addition, if you use a tax accountant to do your taxes, the accountant may charge significantly more to do annual federal and state tax returns for a multi-member LLC than for a single-member LLC. However, since the tax returns of your asset protection LLC are likely to be simple, you may want to use TurboTax or a similar program to do these returns yourself.
— The legislative intent of charging orders is to ensure compatibility among the members of an operating LLC, since any loss of inter-member compatibility in such an LLC – e.g., if a creditor becomes a substituted member – may harm or even destroy the LLC’s business. On the basis of this legislative intent, it’s possible – although, I think, unlikely – that a New Hampshire court would rule that a creditor of a debtor who is a member of a multi-member asset protection LLC can’t qualify for charging protection precisely because the debtor’s LLC is not an operating LLC and thus has no need for inter-member compatibility.
— If you decide to form a non-corporate entity to obtain charging order protections, it should be an LLC rather than a state-law partnership or limited partnership. This is because the ownership and management structure of a limited partnership is significantly more complex than that of a multi-member LLC and because state-law business partnerships won’t provide you with a statutory liability shield. And it shouldn’t be a corporation, since, except in Nevada, corporations don’t provide charging order protections.
— You should form your asset protection LLC under the New Hampshire Act rather than under the Nevada LLC Act. This is because, unless you have a significant connection with Nevada, New Hampshire courts may assume that you have formed your asset protection in Nevada just to make things difficult for your creditors. If a New Hampshire court takes that view, it may well apply its equitable powers (i.e., the inherent power of courts to override otherwise applicable statutory or case law rules in the interest of fairness) to rule for your creditor. And if you get sued in Nevada, you’ll have to hire a Nevada lawyer to defend you and you may have to travel there – perhaps repeatedly – to testify.
— As you may know, New Hampshire law provides for powerful asset protection trusts. In my view, for most New Hampshire residents, New Hampshire LLCs are likely to be more useful than New Hampshire trusts for asset protection purposes. But this is a complex issue, which I’ll deal with in a subsequent column.
In short, while New Hampshire asset protection LLCs may not be entirely bullet-proof, many New Hampshire individuals and families with valuable non-business assets should consider forming one.
John Cunningham is a Concord, NH lawyer of counsel to McLane Middleton, P.A. His practice is focused on LLC formations, general business and tax law, advising clients under IRC section 199A, and estate planning. His telephone number is (603) 856-7172, his e-mail address is [email protected], and the link to his website is www.llc199A.com.