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New Mexico is more than just the home of high desert and alien enthusiasts, its also the place to get better privacy. New Mexico LLCs are one of the only places where you can register a business entity without revealing the name of the members (an owner of an LLC is called a member) to the state or to the public. That anonymity can be a powerful piece in an asset protection plan. But what are the draw backs and how can a New Mexico LLC be used effectively? Asset protection is a highly complex area, but here are some of the main considerations.
Bad News First About Better Privacy: Increased Cost
One drawback to using New Mexico LLCs is that if you conduct business in other states, you will still have to register in those other states. That can increase fees and costs of operating, like having an agent for service of process in NM and elsewhere.
Fortunately, there is only a one-time fee of $75 to register in New Mexico and the cost of an agent for service of process is about $100 per year, so those costs are almost immaterial. If possible, think about making the New Mexico LLC the sole member of a separate LLC formed in another state, rather than registering as a foreign LLC. A foreign LLC will usually require an individual as the public record member. If the New Mexico LLC is the public record member, the person who is behind it has better privacy.
Draw Back #2: Strong State Statutes
Other states, like Nevada, Delaware, and several others, have stronger legal protection for LLCs against judgments. It is much harder for the court to force a liquidation of assets in those states. In New Mexico, it is easier for the assets of the LLC to be liquidated to satisfy a judgment.
In most states, the liquidation protections given to LLCs does not usually extend to single member LLCs. Many LLCs formed for better privacy are single member LLCs, so the liquidation protection wouldn’t apply no matter what the state is.
Now For The Good Stuff
New Mexico LLCs are good for asset protection because they prevent legal action. The better privacy that they offer create a larger hurdle to jump before even starting any legal proceedings.
Better Privacy To Prevent Lawsuits
To understand how New Mexico LLCs protect assets, you have to step into the mind of a good plaintiff’s attorney. They are running a business like everybody else and are looking for the best return on investment they can get. Their return on an investment in a case is a function of how strong their case is, and how many assets there are to satisfy a judgment if they win. Assets usually include things like insurance policies and the unencumbered personal assets of the potential defendant. Most good attorneys will do some investigation into the assets of a potential defendant before taking a case.
Even if a case is a slam dunk winner, if the potential defendant is broke and insolvent, it will do the attorney no good to take it because she will never get paid. The more assets the potential defendant has, the less slam dunk the case has to be for the attorney to have an acceptable ROI.
Using New Mexico LLCs, you can adjust the balance of the equation so that you have fewer public assets available to satisfy potential judgments. This means that in the equation, the facts of the case must be stronger and stronger before a good attorney takes the case.
Proper Procedural Steps
If a case has already been filed, the only way that your personal assets will be discovered in some states is if punitive damages are involved. This means that the opposing party is seeking more money in compensation than the harm you actually caused to teach you a lesson. If no punitive damages are sought, it is unlikely that they will be able to force you to reveal your financial condition.
Even if you are forced to reveal your financial condition, having your assets in an LLC creates other procedural steps to attach those assets. Protecting your assets is not about hindering, delaying, or defrauding creditors, it is simply about making sure that the proper procedural steps are taken before a creditor can reach your assets, like showing the proper level of proof.
The procedural steps can often increase the cost of attaching those assets. The increased cost reduces the potential value to the plaintiff and often gives defendants a better bargaining position to negotiate a favorable settlement.
LLC Interests in Bankruptcy
In a personal bankruptcy, sometimes listing an interest in an LLC makes more work for a trustee. The trustee does not always look closely at the entity and may not include that in the Bankruptcy estate. Thus, any assets held by the LLC would not be used to satisfy claims of creditors and would remain under control of the member of the LLC.
Actions Against The LLC
If you own an asset, such as a piece of real estate, with an entity, you can protect your personal assets from being used to satisfy judgments, or be in play during negotiations, for litigation arising on the property. Personal property of a member will not be used to pay off a liability of a properly formed and functioning LLC. Plaintiffs also have a tendency to name everyone who might possibly be involved in causing a harm, regardless of who was actually at fault, because the injured person doesn’t always know who was at fault. Not having your name in any way associated with the property will prevent you from being named as a defendant if you are not in fact liable for any harm.
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There is no magic bullet for asset protection. Every structure is unique and depends on the unique situation. New Mexico LLCs provide better privacy which can prevent a lot of asset protection problems before they start. They are extremely inexpensive and it might be a good idea to have 5 or 10 formed and ready to use when needed.