This is one of the most common questions I get “why not use a WY LLC as the holding company for my assets?” Now, I am not against the WY LLC. Using a WY LLC is not per se wrong. It has its place. Over all it has fewer benefits and more risk if we ever did end up in a legal gunfight in court over the validity of the structure. The reality is that states like WY, DE, and NV have become very popular “privacy” jurisdictions and unfortunately, this also comes with stigmas and poor optics. They are also now viewed as “sketchy” jurisdictions. Also, for anonymity aka “privacy” to work, this would require you to lie under oath and commit perjury. See my prior articles where I go in depth on Anonymity LLCs.
I prefer the AZ LP to act as a holding company. The reason I prefer it has to do with some very specific features. Some of these have to do with the LP vs. the LLC in general. Others are charging orders that are specific to AZ; and some are very specific to AZ and in particular when connecting an asset protection trust to the plan.
The breakdown goes like this:
- Exclusive Charging Order Protection in AZ as the only remedy available to a creditor of a partner.
- The Statutory Distinction between the General (controlling) partners and the Limited (ownership) partners. In an LP this is laid out by Statute, which is a better construction vs. in the operating agreement alone. LLCs may accomplish this distinction, but only through an operating agreement. It is unclear how a court will interpret your LLC if it ever comes to be challenged in court. This is not the case with LPs. The LP always has 2 classes of ownership, always use multi-member, and are never disregarded entities, and a LP is always a non controlling; non liable limited partner. LPs have been around longer, and have much more consistency on how courts see them.
- ARS 29-333 specifically allows for a LP to make a unilateral withdrawal from the LP “upon the occurrence of a predefined event”. This is unique to AZ and is an ideal section of the AZ code and comes handy when we connect an asset protection trust (Bridge Trust) or (Quantum Living Trust) as the majority Limited Partner. This is truly unique to AZ and is exactly what we need to allow an asset protection trust to “disconnect” from the holding company during a time of duress. The fact that this is statutory is a HUGE plus as well as the fact that the disconnection is being driven from the Limited Partner side as a “unilateral withdrawal” and not a General Partner discretionary move. This simply cannot be done in an LLC in any other State without exposing the client directly to a claim or assisting in a potentially prohibited transfer.
Now, we can strop there and that would already be enough to understand how the AZ LP is superior, but there is more:
- AZ LP is perpetual. Virtually every state in every jurisdiction has an annual report and filing fee for LLCs, LPs and any other structure. The exception is again in AZ and is only the LP, which once filed is perpetual and does not need to be renewed.
- AZ does not require listing of the Limited Partners. Only the General Partner is listed with the Secretary of State in AZ. Limited Partners are by their statutory nature, completely private. This includes the Asset Protection Trust. Now, in some cases, clients want even more privacy and do not want to list a known GP. If this is the case, we can use a WY LLC in the exclusive role as GP. This makes the entire structure completely private. BUT, I discourage this extra step unless complete privacy is absolutely critical. Privacy around any structure can always be broken by placing the client under oath and asking about it. At that point, the client would have to lie under oath and commit perjury. That is a one-way ticket to jail.
- No tax filing required in AZ. But you will have to file your Federal 1065 partnership tax return.
- Your holding company should never be a disregarded entity for tax purposes. We see this mistake a lot. If an LLC has just one member then it is automatically considered a disregarded entity for tax purposes. This is not a benefit, but is really a huge detriment. Disregarded entities for tax purposes are also more likely to be disregarded for liability purpose as well. Your legal entity should maintain its legally distinct identity from you and must file its own tax return. By using an LP, this is guaranteed because an LP can never be a disregarded entity.
When you get more benefits, better statutory construction, and a better statutory connection through ARS 29-333 to the asset protection trusts why wouldn’t you want to take advantage of the AZ LP? It all comes down to proper layering and structuring of the overall planning you create.
Enjoy this recent feature on asset protection from The Professional Investor Show.
Brian T. Bradley, Esq.
Senior Managing Partner
Bradley Legal Corp.
Asset Protection Law Firm