The Asset Protection Industrial Complex: Why Out-of-State LLCs Won’t Save You

California residents spend millions every year on asset protection schemes that provide about as much real protection as a screen door on a submarine. The most popular flavor? Out-of-state LLCs, particularly those formed in Wyoming, Nevada, and Delaware, sold with promises of ironclad charging order protection and impenetrable barriers against creditors.

It’s nonsense. Almost entirely nonsense. And the people selling these structures either don’t understand California law or don’t care.

Here’s what actually happens when you’re a California resident who thinks a Wyoming LLC is going to protect your rental properties from creditors.

The Fundamental Problem: You Live in California

California doesn’t give a damn where you incorporated your LLC. If you’re a California resident conducting business in California, or if your LLC is doing business in California, California law applies. Full stop.

The California Franchise Tax Board will tax your out-of-state LLC. California courts will apply California law to disputes involving that LLC. California creditors will use California’s aggressive creditor remedies to reach your assets, and no cute formation documents from Cheyenne will stop them.

California Revenue and Taxation Code Section 23101 subjects any LLC doing business in California to California taxation, regardless of where it was formed. “Doing business” is defined so broadly that it captures nearly everything. If your LLC owns California real estate, it’s doing business in California. If you’re managing the LLC from California, it’s doing business in California. If the LLC’s activities are controlled by California residents, California will treat it as a California LLC for every purpose that matters.

This means you get to pay both the Wyoming annual fee and California’s $800 minimum franchise tax. You also get the pleasure of registering as a foreign LLC in California, which puts you right back under California’s jurisdiction. Congratulations, you’ve paid twice for the privilege of being sued under California law anyway.

Charging Order Protection: The Great Myth

The entire asset protection industry hangs its hat on charging order protection. The theory goes like this: if you put your assets in an LLC and someone sues you personally, they can’t seize the LLC’s assets. Instead, they’re limited to a “charging order,” which only gives them the right to receive distributions that the LLC makes to you. Since you control the LLC, you simply don’t make distributions, and the creditor gets nothing.

Sounds great. In Wyoming, Nevada, and Delaware, this is indeed the exclusive remedy for a judgment creditor going after a debtor’s LLC interest. These states have statutes explicitly stating that a charging order is the sole and exclusive remedy available to creditors.

California doesn’t have that language. California Corporations Code Section 17705.03 provides for charging orders, but it doesn’t say they’re exclusive. This seemingly minor difference is actually a canyon.

Because California courts aren’t limited to charging orders, they can and do order far more aggressive remedies. In the 2010 case Hellman v. Anderson, the California Court of Appeal affirmed a trial court’s order allowing a creditor to foreclose on a debtor’s LLC interest. Not just get a charging order. Foreclose. Sell the interest. Take over membership rights.

The court didn’t see any problem with this. California law allows creditors to reach any property interest of a debtor that isn’t exempt, and an LLC membership interest is property. If a charging order proves inadequate to satisfy the judgment, California courts will authorize stronger remedies.

So much for exclusive charging order protection.

Single-Member LLCs: Where the Theory Completely Falls Apart

Most people using LLCs for asset protection own 100% of the LLC. This makes the charging order protection argument even more ridiculous.

The whole theory behind charging order protection is that creditors shouldn’t be able to interfere with the rights of innocent co-members. If you and I are 50/50 members of an LLC, and you get sued personally, the argument goes that your creditor shouldn’t be able to force the LLC to make distributions (which would affect me) or seize LLC assets (which are partly mine).

But if you’re the sole member? There are no other members to protect. You are the LLC for all practical purposes. Courts have figured this out.

In In re Albright, the U.S. Bankruptcy Court for the District of Colorado held that charging order protection doesn’t apply to single-member LLCs because the very purpose of that protection is to shield non-debtor members. No other members? No protection needed. The court allowed the bankruptcy trustee to seize the debtor’s entire interest in several single-member LLCs.

California hasn’t directly ruled on this issue at the appellate level, but bankruptcy courts applying California law have been willing to grant remedies beyond charging orders when dealing with single-member LLCs. The logic is inescapable: if the debtor is the only member, there’s no policy reason to limit creditors to a charging order that the debtor can render worthless by refusing to make distributions.

The asset protection gurus know this, which is why they’ll often recommend making your spouse or kids nominal members of your LLC. This creates its own problems, of course, because now you’ve actually given away ownership interests in your property. If your spouse divorces you, guess what? They own part of your LLC. If your kid gets sued, creditors can come after their LLC interest. You’ve solved one theoretical problem by creating several real ones.

Series LLCs: Peak Ridiculousness

Delaware and other states allow series LLCs, which are supposedly a single LLC that can be divided into separate “series,” each with its own assets and liabilities. The theory is that if series A gets sued, the creditor can’t reach the assets of series B, C, or D.

The asset protection crowd loves series LLCs. They’ll set up a Delaware series LLC with each series holding a different property or asset, promising that this provides liability protection without the cost of forming separate LLCs.

Here’s the problem: California doesn’t recognize series LLCs. At all. California AB 1522, passed in 2011, explicitly prohibits California LLCs from being structured as series LLCs. More importantly, California law doesn’t recognize the separate series of foreign series LLCs as distinct entities.

If you form a Delaware series LLC and do business in California, California will treat the entire series LLC as a single entity. A creditor of one series can potentially reach the assets of all series because California doesn’t acknowledge the internal liability shields between series.

You’ve bought expensive snake oil.

The Nevada Scam

Nevada markets itself aggressively as an asset protection haven. No state income tax! Strong charging order protection! Privacy! The Nevada LLC formation industry is a well-oiled machine, pumping out formations for out-of-state residents who think they’re getting something special.

They’re not. For California residents, Nevada provides exactly zero additional protection.

Nevada’s charging order statute, NRS 86.401, does state that a charging order is the exclusive remedy against an LLC member’s interest. But this statute only applies in Nevada courts, under Nevada law. When a California creditor sues a California resident in California court, California law applies. The California court will enforce the California judgment using California remedies, and Nevada’s statute becomes irrelevant.

The Nevada LLC also has to register and pay taxes in California if it’s doing business here or owned by California residents. You get no tax benefit. You get no anonymity because California requires disclosure. You get no asset protection because California law applies to the dispute.

What you do get is the privilege of paying Nevada’s commercial registered agent fees and California’s franchise tax, plus the cost of maintaining compliance in two states.

Why People Fall For This

If out-of-state LLCs are so useless for California residents, why do so many people form them? Several reasons, none of them good.

First, the asset protection industry is lucrative. Attorneys and promoters who sell these structures charge substantial fees for the formation, annual maintenance, and complex management of multi-state entities. They have a financial incentive to keep the myth alive.

Second, the pitch sounds sophisticated. “I have a Wyoming LLC” sounds more impressive than “I have a California LLC.” People equate complexity with protection. The more convoluted the structure, the more protected they must be, right? Wrong. Complexity usually just means more compliance requirements, more costs, and more ways to screw up.

Third, people want to believe there’s a magic bullet. The idea that you can shield your assets from creditors simply by filling out the right formation documents in the right state is appealing. It feels like a life hack. But asset protection isn’t a hack. It’s a function of substantive law, and California’s substantive law is creditor-friendly by design.

Fourth, the promoters cherry-pick favorable cases from other states and pretend they’ll apply in California. Yes, Wyoming has strong charging order protection. But you don’t live in Wyoming, your creditors aren’t in Wyoming, and the lawsuit won’t be in Wyoming. The Wyoming statute might as well be written in Sanskrit for all the good it’ll do you in Los Angeles Superior Court.

What Actually Works in California

If out-of-state LLCs are garbage, what actually provides asset protection for California residents?

Insurance. Lots of insurance. Umbrella policies. Professional liability insurance. Proper commercial general liability coverage. Insurance is the most cost-effective, reliable form of asset protection available. It actually pays claims. It provides a defense. It works.

Retirement accounts. ERISA-qualified retirement plans are generally protected from creditors under federal law. IRAs have protection under California law up to amounts reasonably necessary for retirement. Max out your 401(k). Fund your defined benefit plan. These assets are substantially protected, and you’re saving for retirement anyway.

Homestead exemption. California’s homestead exemption automatically protects equity in your primary residence from creditors. As of 2021, the exemption is at least $300,000 and scales up to $600,000 depending on county median home prices. You don’t need to file anything. It’s automatic. Use it.

Tenancy by the entirety. California doesn’t have this (it’s a community property state), but it’s worth mentioning because some states do. In states that recognize tenancy by the entirety, property held by married couples can be protected from the individual creditors of one spouse. This is real protection, built into state property law. It’s not a gimmick. California doesn’t offer it, but if you move to a state that does, it’s worth understanding.

Equity stripping. This is a legitimate strategy where you encumber assets with legitimate debt, reducing the equity available to creditors. If you have $500,000 of equity in a property, a judgment creditor can seize it. If you refinance and pull out $400,000 (which you invest elsewhere or use to pay down other debt), there’s only $100,000 of equity for the creditor to chase. This has to be done carefully and for legitimate purposes, not as a fraudulent transfer, but it’s a real technique.

Multiple entities for liability segmentation. If you own multiple rental properties, holding each in a separate LLC actually makes sense. Not because the LLC provides asset protection for your personal assets (it doesn’t, really), but because it provides liability segmentation between properties. If someone slips and falls at property A and sues the LLC that owns it, they can’t reach property B owned by a different LLC. This isn’t asset protection in the traditional sense; it’s liability management.

Irrevocable trusts. If you transfer assets to a properly structured irrevocable trust, those assets are generally beyond the reach of your creditors because you no longer own them. The trust does. This is real asset protection, but it requires actually giving up control of the assets. You can’t have your cake and eat it too. Revocable trusts provide no asset protection because you still control the assets.

The Fraudulent Transfer Problem

Here’s the thing that asset protection promoters often gloss over: if you transfer assets to an LLC, trust, or any other entity after you have a creditor problem, or in anticipation of a creditor problem, it’s a fraudulent transfer. California’s Uniform Voidable Transactions Act allows creditors to void transfers made with intent to hinder, delay, or defraud creditors.

The remedy? The court unwinds the transfer. Your LLC or trust provides zero protection because the creditor gets to reach through it and seize the assets as if the transfer never happened.

This is why asset protection planning must be done before you have any creditor issues. If you’re a doctor and you just got sued for malpractice, it’s too late to start moving assets around. If you’re a business owner and your company is failing, it’s too late to transfer property to your spouse. The law sees through these maneuvers, and judges have no patience for them.

The asset protection industry will sometimes pitch “pre-bankruptcy planning” or “strategies to protect assets from imminent lawsuits.” This is playing with fire. Yes, there are some legitimate planning strategies that can be done relatively close to a creditor event, but the line between legal planning and fraudulent transfer is thin, and the penalties for crossing it are severe.

The Offshore Scam

Some promoters push this to the next level: offshore trusts and LLCs. The Cook Islands! Nevis! The Cayman Islands! These jurisdictions supposedly offer even stronger asset protection laws that U.S. courts can’t touch.

This is where the scam reaches its final, most expensive form. Offshore trusts can cost $50,000 or more to establish and thousands per year to maintain. They require foreign trustees, complex administration, and careful compliance with U.S. tax reporting requirements.

Do they work? Sometimes. If you’re a multi-millionaire with genuine international business interests, facing a creditor with limited resources, an offshore trust might make it expensive enough for them to pursue you that they give up. But it’s not a magic shield. U.S. courts can and do order debtors to repatriate assets from offshore trusts. If you refuse, you go to jail for contempt until you comply.

In FTC v. Affordable Media, the Ninth Circuit affirmed contempt sanctions against defendants who claimed they couldn’t repatriate assets from their Cook Islands trust. The court didn’t buy it. The defendants went to jail. The assets eventually came back.

For ordinary California residents with California real estate and California income, offshore structures are absurd overkill that create massive tax reporting burdens and accomplish nothing meaningful.

The Real Purpose of LLCs

LLCs do serve legitimate purposes. They provide liability protection for your personal assets from business debts and claims. If your LLC owns a rental property and a tenant sues for a slip-and-fall, they sue the LLC, not you personally. If they win, they can take the LLC’s assets (the property), but generally not your personal house, car, or bank accounts.

This is called the “corporate veil,” and it’s real. But it only works in one direction. It protects you from the LLC’s liabilities. It doesn’t protect the LLC’s assets from your personal liabilities.

If you personally guarantee a loan, get in a car accident, or face a malpractice claim, your creditor can reach your ownership interests in LLCs, your rights to distributions, and potentially the LLC assets themselves through various legal mechanisms. The Wyoming formation documents won’t stop them.

LLCs also provide tax flexibility, allowing pass-through taxation while offering more management flexibility than S corporations. They’re useful for estate planning, allowing you to gift minority interests to children at discounted values. They’re good for business organization and management.

These are all legitimate reasons to use an LLC. “Asset protection from personal creditors” is not high on the list, especially if you’re the sole member.

The Bottom Line

The asset protection industrial complex thrives on fear and misinformation. They sell the dream that you can shield your wealth from creditors through clever entity structuring, without actually giving up any control or access to your assets. They dangle the promise that some distant state’s laws will protect you from California creditors, despite California’s assertive jurisdictional statutes and creditor-friendly case law.

It’s mostly fiction. Out-of-state LLCs provide minimal actual protection for California residents while adding cost, complication, and compliance burdens. The charging order protection that’s supposedly the crown jewel of these structures is either unavailable under California law or easily circumvented by California courts.

Real asset protection in California comes from insurance, retirement accounts, homestead exemptions, legitimate estate planning with irrevocable trusts, and careful liability management through entity segregation. It requires advance planning, before creditor issues arise, and it often requires actually giving up some control over assets.

It’s not sexy. It’s not sold through high-pressure seminars. It doesn’t involve exotic jurisdictions or complex structures. But it works.

If someone is pitching you a Wyoming LLC or Nevada series LLC as the solution to your asset protection needs, and you live in California, do business in California, and own California assets, you’re being sold something between a useless complication and an outright scam. Save your money. Buy more insurance. Fund your retirement accounts. Work with an attorney who practices in California and understands California law.

The magic bullet doesn’t exist. The sooner you accept that, the sooner you can build real, effective protection for your wealth.