Multi-LLC planning strategies are not exclusive to LLCs alone. These same strategies may be used with limited partnerships or corporations. However, corporations don’t have charging order protection, and limited partnerships don’t have limited liability for the general partner, although we can compensate for this shortcoming by using an LLC as the general partner. Therefore, the following planning strategies are usually most effectively used with LLCs.

The 1st strategy is very simple: we put various assets into separate LLCs so as to segregate certain assets from the potential liability produced by other assets in. This is called “liability segregation” and is especially useful in protecting non-liability producing or “safe” assets, such as investments, from high-risk or “dangerous” assets, such as a vehicle or business that contracts with the public. If a vehicle or high-risk business is in one LLC, then, a lawsuit against that LLC will not threaten the assets in another LLC. Likewise, a lawsuit against an LLC’s owner will not threaten assets in his LLC, and will not affect his interest in an LLC beyond the creditor possibly obtaining or foreclosing on a charging order. The figure below illustrates the concept of liability segregation.

Although a multi-LLC approach is effective, it is not without its drawbacks and vulnerabilities. First, multiple LLCs generally mean multiple tax returns, administrative costs, added complexity, and higher overall governmental fees (such as annual reports, or franchise taxes such as the infamous $800 minimum California LLC tax and fee levied on each LLC registered or doing business in California.) Furthermore, although one LLC’s assets are not exposed to liability arising from another LLC’s liability, an LLC that is sued could still potentially lose all its assets to the creditor who is suing it. There are ways to overcome or minimize this weakness, including equity stripping, and also the strategy we discuss next.

A weakness is that multi-LLC strategies have a small chance of having their LLCs’ veils pierced if they are structured incorrectly. This type of piercing does not involve a creditor being able to attach the assets of an entity’s owners; rather it involves a creditor being able to disregard the segregation of liability between multiple entities. In other words, a creditor may be able to reach the assets of all related entities for the liability of one entity. Veil piercing in general is “an extreme measure, sparingly used”, and in most cases separate entities will not be treated as one for purposes of what a creditor may attach, however if there is an egregious act of bad faith, gross negligence, or fraud, then a judge may consider whether an alter ego argument is appropriate. In such an instance, the courts will consider the following:

• Using the same offices and employees
• Identical managers for each entity
• Commingling of funds and other assets between the entities
• The holding out by one entity that it is liable for the debts of the other
• Using entity one as a mere shell or conduit for the affairs of the other
• Failure to keep separate company records
• Identical equitable ownership in the two entities

Keep in mind that a judge may use the above only as factors to help him decide if disregarding separate entities’ limited liability is appropriate. Disregarding one or more of the above may not lead to a veil-piercing. However, when structuring multiple related entities, it is wise to avoid as much of the foregoing as possible. The first four criteria are especially damaging and may be easily avoided in almost all circumstances. The other criteria are often avoidable without too much trouble. For example, it is not hard to set up separate P.O. boxes for different entities. Two entities may have the same majority owner but different minority owners (perhaps the minority owners own as little as 1-5% in a company.) If there are 2 multi-member LLCs, then one member could manage entity A and the other could manage entity B. Structuring in this manner minimizes any excuses a creditor might use to make a veil-piercing argument in court.