What is a COPE LLC?
If you’ve been reading about a COPE LLC, you’re not alone. “COPE” stands for “Charging Order Protection Entity”, and therefore a COPE LLC is considered a LLC that helps provide “Charging Order Protection,” and is considered beneficial for asset protection purposes.
It’s important to understand that “COPE LLC”, like our “Anonymous LLC”, is a made-up term to explain some benefits you could potentially achieve, if you do things correctly. Both terms aren’t actually defined by statute. If you walk into a Secretary of State’s Office, or a bank, they will likely look at you awkwardly if you tell them you have a COPE LLC or an Anonymous LLC. It’s like going to an auto-repair store, and when they ask you what type of car you have, you say “Fast Car”. This describes what you have, of course, but it’s really “not a thing.”
So, how do you obtain “Charging Order Protection?” The answer is a bit complicated, because you have to (1) abide by the laws where you’re “conducting or transacting business”, (2) incorporate the right type of entity from the right state, and (3) you actually have to conduct business with the LLC in the right way, lawfully, to prevent a plaintiff from trying to “pierce the corporate veil.”
Step 1: You need to abide by the state laws where you are conducting business, for a COPE LLC to work.
Every state in the United States requires that you “register your company” in that state, if you’re conducting business in that state. Each state has its own rules on “what isn’t” conducting business, and very few states have rules indicating “what is” conducting business. A general rule of thumb is, if you have a W2-based employee in a state, or your base of operations is in a state, or you have a retail location where you are inviting members of the public in to purchase, or you “purposefully avail” of yourself in a state, or a significant portion of your revenue comes from a particular state (i.e. usually 20% or more), you’re probably doing business in that state.
If you’re running a business from your state of residence, then you are typically considered conducting business in that state — regardless of where your customers are, and regardless if your business is 100% online.
Because of this rule, you should form a “Child LLC” in the state of residence or the primary state where you’re conducting business. If you’re state is one of the states that passed the Revised Uniform Limited Liability Company Act (or RULLCA), then you can just form the one LLC and be okay, unless you care about anonymity. Then, you’ll need a parent-child structure, as we discuss in more depth below. You can also learn more about such structures here: Which State is Best for Anonymous LLC’s?.
Step 2: You need to incorporate the right type of entity from the right state, to form a COPE LLC.
All states what’s called a “limited liability company act” on the books, which defines the legal status and associated rules around an LLC. About 10 or so years ago, the uniform law commissions created a new, revised legal framework for LLC’s called the Revised Uniform Limited Liability Company Act (or RULLCA). For the past 10 years, the RULLCA is slowly being adopted by the states. As of this writing, the RULLCA has been adopted by AL, AR, AZ, CA, CT, FL, IA, ID, IL, MO, ND, NE, NJ, PA, RH (introduced), SD, UT and WY. Of these states, only WY and AL provide the ability for anonymity. Because WY does not have state income tax, WY is considered a favored state for anonymity and COPE.
So, in order to achieve “Charging Order Protection,” one must utilize a LLC from one of the RULLCA states listed above. But, remember Step 1 above, you need to register your company in the state (or states) you are conducting business in. If you’re located in a RULLCA state, and your only goal is asset protection (i.e. COPE LLC), then you can simply form a LLC in the state you’re located. If your goal is also anonymity, if you are located in AL or WY, you’re okay. You can both anonymity and asset protection. If, however, you are not in AL or WY, then you need to adopt a parent / child structure, where your child is your operating entity and your parent is a hold company, located in WY.
For all states, except for CA, you have a structure (for anonymity and asset protection) that looks like this:
YOU –> (own) a WY LLC as a holding company –> (which owns) a regular LLC in your home state
If you are in CA, then you want this structure:
YOU –> (own) a NM LLC as a management company
–> (own) a regular CA LLC as your operating company, which is managed by the NM LLC
Why did I say “NM LLC” instead of a “WY LLC” for CA? Because CA is a RULLCA state, and you get asset protection with a standard CA LLC. But, you don’t get anonymity. Therefore, we tell the CA Secretary of State the manager, which is a NM LLC. We pick NM LLC over WY LLC, simply because of the cost. NM LLC’s are less cost to form and maintain. The NM LLC is not moving money around, so we don’t care about the tax situation — and we don’t want to move money around it, otherwise the CA FTB may require the management company to be registered in CA, destroying your anonymity.
Whew! You still following all of this? If not, we do sell 30-minute business attorney consults where you can talk to an attorney, and figure out the right way to structure an entity.
Step 3: Conduct business with the LLC in the right way, lawfully, to prevent “Piercing the Corporate Veil” on a COPE LLC.
It’s important to remember that LLC stands for “limited liability company”, not “unlimited liability company”. Otherwise, LLC would be ULC!
No matter how you setup your entity structure, there are some important issues to be aware of, because there is no such thing as “absolute protection.” In order to ensure your structure does indeed protect assets, you must make sure you don’t give anyone an argument to “pierce the corporate veil.” What is that?
Before we get into what “piercing the corporate veil” means, let’s remember there are two types of assets: Assets that are owned by the LLC, and assets outside the LLC, such as assets owned by related companies or the owners of a LLC. Assets within a LLC are typically fair game, and what that means is, if someone has a cause of action against a LLC, the assets within that LLC are potentially at risk. “Asset protection” typically means, how do you prevent the liabilities of a LLC from placing other assets, not contained within that LLC, at risk.
“Piercing the corporate veil,” then, means trying to go after assets that are not contained within the LLC. That means, going after assets that are typically associated with the owners of a LLC.
Piercing the corporate veil is a legal argument a plaintiff’s attorney can make, and if they can prove it, they can go after the owners of the LLC and therefore your assets that are not owned by that LLC. Such legal arguments typically involve some sort of “wrong doing” by the LLC, or the management of the LLC. For example, if a plaintiff can prove one of the following, you can have a problem on your hands:
- Not following corporate formalities. This is why the Operating Agreement for your LLC is so important. If you’re not conducting the proper votes, when required to borrow, sell significant assets, etc, or you otherwise take action not permissible or generally manage your LLC in ways that aren’t permitted by your Operating Agreement, you could get yourself into trouble. Take care to operate within the bounds of your Operating Agreement, and take accurate, detailed records (called “minutes”) of meetings and of important decisions.
- Commingling. Commingling involved intermixing your personal assets with the assets of the LLC. This could involve having your LLC otherwise pay for personal expenses (i.e. groceries, rent, mortgage, cell phone, etc), or it could mean sharing space without paying rent, or sharing employees without allocating between multiple businesses. If you want your business to reimburse you for personal expenses, that’s acceptable provided you do it properly. Consult with an accountant, CPA or other tax professional.
- Inadequate Capitalization. This means you starve your LLC for cash, and are constantly taking out money that it needs to cover its debts and operate effectively.
- Engaging in Fraudulent Behavior. If the owners of a LLC are acting recklessly or in disregard to the rules of law, or dishonestly, courts may be willing to permit wrong or aggrieved parties to go after the owners.
This is not a complete list, but typically the most common failures we see. There are other possibilities, which can vary depending on the state and other factors. If you’re concerned, we would strongly advise you to consult with a business attorney.
How Can L4SB Help You with Your COPE LLC?
A COPE LLC is just another name for what L4SB has been doing for over a decade for thousands of clients: Forming a careful corporate structure, to maximize asset protection and obtain other benefits (i.e. like anonymity).
You have options with L4SB:
Law 4 Small Business (L4SB). A Slingshot company. A little law now can save a lot later.
