(This is one of the worst things that can happen to your LLC)
Carol Gonnella, JD & Cecil Smith, JD
Many of our clients have created limited liability companies (LLCs) to hold some of their assets. This is often done because the client has a goal of creditor protecting the assets in the LLC.
Individuals who create LLCs have a couple of options when they create the entity. The LLC can be created in a state that allows the LLC to be designed is such a way as to be protected from future lawsuits. or it can just be designed to operate a business (a home remodeling business, a barber shop, or a hardware store, for example). In other words the LLC is not designed or intended to be protected from future lawsuits.
The major reason most of these individuals create LLCs is to gain the protection from lawsuits that is available through the Wyoming LLC. There are two types of lawsuits that concern our clients.
Outside Lawsuits & Inside Lawsuits
Outside Lawsuits. The first type of lawsuit is an “outside lawsuit.” An outside lawsuit is a lawsuit against an owner of an LLC that has nothing to do with the business of the LLC. Examples of outside lawsuits are (a) automobile accidents, where the owner of an LLC is sued because of the accident, (b) medical or other professional malpractice, where the owner of an LLC is sued because of a patients or client’s bad result based on alleged bad advice or alleged negligent services received from a doctor, lawyer, architect, or other professional.
Inside lawsuits. The second is an “inside lawsuit.” An inside lawsuit is a lawsuit against the LLC itself because of an accident within the LLC. Examples of an inside lawsuit include someone who is injured when they slip and fall on the premises of the LLC, or a fire in a rental property that kills or injuries the tenant.
Two Options When Your LLC is Created
Option #1. An individual may choose to create their LLC wherein it has no creditor protection. In other words liability is not limited as to the LLC or it’s owners. Thus, if a lawsuit is filed against the LLC or the owners of the LLC (either an inside lawsuit of the business or an outside lawsuit of the business against an owner of the LLC) the creditor has the ability to attach ALL of the assets owned by the client and not otherwise protected, whether business related or not. If this option is chosen, the LLC need not be filed with the Secretary of State (or other state regulating entity). This option is quick, simple and inexpensive. This type of LLC is an attractive option to some individuals.
Option #2. However, all 50 states have enacted legislation allowing individuals to form LLCs and other business entities (corporations, limited partnerships, etc.) that provide some level of asset protection. In other words the states have allowed individuals to put some of their assets into a wrapper (an LLC) that provides limited liability protection. Those wrappers can be corporations, limited partnerships, or limited liability companies (LLCs). Today, most entities use the LLC wrapper, and thus this article addresses only the LLC, although the basic concepts (perhaps with some modifications) apply to all business entities.
This second option is not as simple as the first option and comes with some costs (legal fees, accounting fees, filing fees, etc.); however, most feel the initial and the ongoing maintenance costs are justified in order to get the limited liability protection. In other words, if you want the protection you have to pay a price to get it.
To have limited liability protection, not only does the LLC have to organize under the laws of a state that provides limited liability to LLCs, file organizational papers with the Secretary of State, and the LLC must abide by certain mandatory requirements (Annual Reports, etc.) of the state to continue to have the benefits afforded it by the state statutes from year to year.
All states mandate that some ongoing contact be maintained with the Secretary of State. Many states require that an Annual Report be filed and an annual fee be paid to keep the LLC in existence. This article is only addressing the statutory requirements in the State of Wyoming, but most states are similar in their requirements. If you have an LLC in another state, it is suggested that you review the requirements in that particular state.
Wyoming has some of the best (if not the best) creditor protection legislation in the country for LLCs. However, if the state mandates are not followed, the LLC can lose that protection. The Secretary of State can administratively dissolve the LLC or declare it to be defunct. (It should be noted that the authors use the words “administrative dissolution”, but state statutes may use the words “forfeiture”, “defunct”, and/or “cancellation” to mean the same thing). This is one of the worst things that can happen to the LLC and it should be avoided at all costs. All too often, the client has no idea that the administrative dissolution has taken place and continues to run the business as usual. The problem is that after an administrative dissolution, the LLC may no longer have the limited liability protection and the results of that can be disastrous. There are numerous cases wherein a Court has ruled that the owners of an LLC are not protected from personal liability when the LLC has been administratively dissolved. The three main reasons why an LLC will be administratively dissolved are as follows:
1. Failure to file the Annual Report to the Secretary of State. This is a two-page report that is due every year on the anniversary date of the creation of the LLC.
2. Failure to pay the annual fee to the Secretary of State. In Wyoming this fee is generally $50 per year, and is due on the anniversary date of the creation of the LLC.
3. Failure to maintain a Registered Agent that is qualified to serve. The Registered Agent may be an individual who resides in Wyoming, or a Commercial Registered Agent like Teton Agents, LLC that has a physical office within the State of Wyoming that is open during regular business hours, maintains certain records of the LLC and is properly staffed to take care of business.
In Wyoming, their procedures are outlined with slight differences for failure to have a registered agent versus failure to pay the annual fee. Wyoming Statute 17-29-705 controls both of these scenarios.
If an LLC does not have a qualified registered agent in the State of Wyoming, the following occurs:
1. The Secretary of State mails to the LLC—by certified mail—a notice of failure to comply;
2. The LLC has 60 days to get a qualified registered agent and notify the Secretary of State;
3. If the LLC has not obtained a qualified registered agent within the allotted time period, it is deemed defunct and has forfeited its Articles of Organization (the document filed with the Secretary of State that created the LLC);
4. The deemed defunct LLC may—within 2 years after being declared defunct, be revived and reinstated by getting a qualified registered agent and paying a fine (currently $250) to the Secretary of State.
If an LLC has not paid its annual fee, it is deemed to be transacting business without authority and is deemed to have forfeited any franchise, rights or privileges. The following occurs:
1. The Secretary of State mails—by first class mailing—a notice to the last known address of the LLC that it has not paid its annual fee.
2. Unless the fee is paid within 60 days of the notice date, the LLC is deemed defunct and is deemed to have forfeited its Articles of Organization or Certificate of Authority.
3. The defunct LLC may—within 2 years after forfeiture—be revived and reinstated by paying the delinquent fees.
4. When the reinstatement is effective, it relates back to take effect as of the effective date the LLC was deemed defunct. The LLC may resume the carrying on of its business as if it had not been deemed defunct.
If there is any “silver lining” to automatic administrative dissolution, it is that the LLC may, if it acts within the two-year period, be reinstated by the Secretary of State and by statute, the reinstatement relates back to the day of dissolution. However, creditors may argue that their claim occurred during the period when the LLC was dissolved and there should be no relation back. Most Courts have been sympathetic to the LLC and have granted limited liability, but the best course of action is to never let the LLC become administratively dissolved in the first place. No one wants to give creditors grounds for getting into court with an argument that must then be litigated.
If the reasons that caused the Secretary of State to administratively dissolve the LLC are not corrected within the two years, then all bets are off. The LLC is forfeited and dissolved and there is no way to get it reinstated. The members (owners) of the LLC have lost all their liability protections from inside lawsuits and the assets in the LLC have lost all protections from outside lawsuits.
WE HAVE CREATED A SOLUTION
We, at Teton Agents, never want your Wyoming LLC to be inadvertently administratively dissolved. Thus, we have implemented procedures to ensure you are in compliance with Wyoming’s procedures. We now provide a service to each of our clients to protect them from such a dissolution. We do not know of any other registered agent who provides this service. Annually, on the anniversary date of your LLC, we search the Secretary of State’s records of your LLC. If we find that your LLC is in default for any reason, we personally contact the manager of your LLC so the default can be corrected in a timely fashion. It is very important to us that your LLC is never deemed to be dissolved and that you and the other owners of your LLC continue to have the statutory protections afforded for the assets in your LLC.