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To Get the Most Liability and Asset Protection for My LLC, Should I Add a Partner?

with 2 comments

Joe Escalante

Hi Joe,

I’m running my LLC in Chicago, Illinois, as a sole proprietor. I’m not getting the liability and asset protection as a sole proprietor of my LLC. I’m considering getting a partner. What forms do I need to file?

– Gustavo Santana


Barely Legal Radio w/ Joe Escalante

1. Yes, in many states a single-member LLC would have less protection from personal creditors for its members than a multi-member LLC. However, Illinois, to the best of my knowledge, hasn’t really settled on how they are going to treat single vs. multi-member LLCs in many respects. This is a relatively new area of the law.

2. True, to get the fullest limited liability protection from personal creditors in all states, an LLC should have at least two members. However, don’t add your simpleton cousin to the LLC as a sham. The second owner can be a spouse or even that simpleton cousin, provided they are treated as a legitimate co-owner of the LLC.

If the courts smell a sham, they will likely treat the LLC as a single-member LLC. To avoid this, the co-owner must pay fair market value for the interest acquired and otherwise be treated as a “real” LLC member, i.e., they must receive financial statements, participate in decision-making, and receive a share of the LLC profits equal to the membership percentage owned.

3. Even if you get the other member, you could have a court battle that doesn’t apply Illinois law if you were doing business or own property in a state that has laws less friendly to LLCs than your home state. Where you file is not the end of the story when it comes to personal liability and asset protection in connection with your LLC. Also, the protections state LLC laws provide to LLCs may be ignored by the federal bankruptcy courts.

I don’t practice in Illinois, but they seem to require this form LLC-5.25 when adding a partner.

Attorney Joe Escalante answers your legal questions for free on our Facebook page every Tuesday and Friday at 10 a.m. PT.


The advice Joe gives is general; it is solely his opinion and not that of LegalZoom. He is a licensed California Attorney with years of experience; users from other states should take care to review the laws in their own states. LegalZoom is not a law firm. This free service is intended to get you headed in the right direction, not to replace an attorney. This is a public forum. No attorney-client relationship is formed with Joe, or LegalZoom, and the attorney-client privilege does not apply. LegalZoom does not verify, validate, or confirm the advice given by Joe. LegalZoom cannot guarantee the quality, or reliability of any legal advice provide by Joe.

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March 28th, 2014 at 10:16 am

Posted in Free Joe,Legal News

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