The Importance of Competent LLC Management
March 2024
Forming an LLC is the easy part. The protection the structure is supposed to deliver depends almost entirely on how it is administered after formation — and on whether the manager is, in fact, independent of the member.
Since the limited liability company first came into being in the State of Wyoming in the late 1970s, the LLC has become ubiquitous throughout the United States and the major offshore business centers. The flexibility LLCs offer — closer to a partnership than a corporation — makes them convenient for conducting business with minimal formality. The barriers to member-creditor liability make them at least as effective as the more traditional limited-liability vehicles.
Perhaps the greatest benefit of the LLC over its incorporated counterparts is the protection afforded members from their personal creditors. As a general matter, a member’s creditor cannot interfere with the management of the LLC nor compel a distribution of LLC property. In many jurisdictions, the creditor is further limited to a charging order as the exclusive remedy available against a debtor-member’s interest. Under a charging order, the creditor may only collect if and when distributions are actually made to that member.
As a consequence, the most prevalent form of LLC established worldwide is the manager-managed LLC. A manager-managed LLC severs ownership from management. A person may serve as a member without participating in management; another may serve as manager without holding any ownership interest at all.
Comparison to the self-settled spendthrift trust.
The self-settled spendthrift trust has long been the prevailing tool for asset-protection planning. Its primary virtue is the same severance: trust assets are managed by a trustee free of creditor interference, while beneficiaries hold the beneficial interest without the power to demand a distribution that a creditor could intercept.
Asset-protection counsel frequently recommend the LLC for the same reason. The LLC manager functions much like the trustee — administering the entity’s assets from a jurisdiction whose statute supports the work. Members benefit from ownership without the risk that one member’s creditor will interfere with the LLC’s operations or force a distribution.
Structured properly, an LLC can perform many of the functions of a self-settled spendthrift trust with material advantages: LLCs are typically simpler and less expensive to establish and administer, even in the offshore asset-protection jurisdictions; LLCs are largely unregulated in the United States, and most offshore jurisdictions do not regulate them to the extent they regulate trusts. In some cases — where a contributing member’s creditor exposure is already underway — an LLC can also offer protections a trust cannot, including a discernible business purpose for the contribution and simpler tax reporting.
The manager problem.
In considering a manager-managed LLC, the choice of manager is everything. There are many trustee companies available for hire in the United States and offshore. Professional LLC management companies — firms organized to administer LLCs with the same fiduciary discipline a trustee brings — are almost non-existent.
Members of the firm’s management team are principal or contributing authors to LLC legislation in a number of U.S. states and key offshore business centers. The firm was the first to integrate the role of an LLC protector in planning, enabling clients to embed fundamental safeguards in their operating agreements when engaging a professional manager.
Whether a client requires a professional manager or administrative support for in-house management, the firm offers the full discipline: plan design, operating agreement terms, state and federal compliance, accounting, banking, documentation of manager and member meetings, member communications, and KYC/AML compliance.