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Why It’s a Bad Idea to Hire a “Straw Man” as a Manager to Maintain Anonymity

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  5. Why It’s a Bad Idea to Hire a “Straw Man” as a Manager to Maintain Anonymity
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  5. Why It’s a Bad Idea to Hire a “Straw Man” as a Manager to Maintain Anonymity

There is quite a bit of documentation on the Internet about anonymity, and how to maintain anonymity in states that do not permit anonymity. Unfortunately, like much information on the Internet, not all of it is great advice.

For example, some of our competition recommends a “Double LLC” for Florida. We wrote a blog article about this, entitled The Florida Double LLC is Double Trouble.

This article addresses the advice provided by others on the Internet, including some of our non-legal competition. That advice goes like this: “State (fill-in-the-blank) requires either Members or Managers to be disclosed, so all you need to do is put in a Manager that isn’t you to maintain your anonymity.” Sometimes, you will see advice that says something to the effect of, as soon as you form your company, you change it. Sometimes, our competition may offer “nominee services” or management services for folks, saying they will be your straw man manager helping to maintain your personal anonymity.

There are two critical problems that can arise, unless you are lucky, very careful and not dealing with unsavory elements forming your LLC or giving you advice. Those problems are:

  • The LLC could lose its liability protection
  • You could find yourself at the mercy of an unknown third-party

The LLC Could Lose Its Liability Protection

Liability protection can be lost in one of two ways. First, all states require that the information you put on your Articles and submit to the state is accurate, with various penalties if not accurate. All penalties include losing the liability protection the LLC is supposed to afford. This means — by statute — the LLC no longer renders the owners liability protection. When this happens, you can be personally sued for the damages and liabilities of the LLC.

The second way the LLC can lose its liability protection, is through what is called “piercing the corporate veil.” This can happen, when an aggressive plaintiff goes after the owners, alleging the owners are co-mingling funds, not following corporate formalities, using the LLC as an alter-ego of themselves, and more. This is a method used in lawsuits, when a plaintiff is trying to sue the LLC, and go after the owner. It will be a successful method, by the way, if your paperwork isn’t squeaky clean. If you have a “straw man” listed as a manager with no legal power, or unavailable despite what your corporate documents say, you can expect a plaintiff’s attorney to attempt to pierce the corporate viel (i.e. liability protection) of your LLC.

You Could Find Yourself at the Mercy of an Unknown Third-Party

Hiring a “straw man” as a manager for your company is potentially inviting the fox into the hen house. Specifically, Managers of LLC’s have specific powers granted to them over the LLC by statute. These powers are numerous and can (not always) be overridden by a good Operating Agreement. So, you’re depending on a good Operating Agreement to make sure you cannot be taken advantage of by the Manager, and if you’re not really, really careful, you could get yourself into trouble because of the unavailability of the Manager years later.

Every state has a limited liability company act on its books, and a “Manager” is woven throughout the statute. For example, just picking three states at random:

  • In Texas, there are 47 references to “Manager” in the limited liability company act.
  • In Florida, there are 262 references to “Manager” in its limited liability company act.
  • In New Mexico, there are 80 such references.

What this means is, when you designate a manager, that manager has REAL POWER AND REAL AUTHORITY over your company and its assets, as granted in (1) the Operating Agreement and (2) Statute. If you’re REALLY CAREFUL in how the Operating Agreement reads, you can certainly limit the Manager’s power, at least to the extent the statute in your state permits.

If you have significant assets in your LLC, you better really know who your Manager is and you better really know what sort of power or authority the Manager can exert.

We have two potential problems with such a “straw man” Manager:

  • A Manager can exert power or control over your company or assets if you’re not careful, and create new liability for the LLC if you happen to have an untrustworthy Manager.
  • If you need the Manager for something, such as signing paperwork, but that Manager is no longer available, you could find yourself in a real legal jam.

I’ll give you an example of the latter issue: We had a client who did just this thing. One of our competitors assigned one of their company employees as as the “Initial Manager” to the LLC they formed for my client, and then my client used that LLC to acquire some real estate. This “Initial Manager” also submitted a “resignation letter” as part of the purchase, but it wasn’t done properly unbeknownst to my client.

Years later, when it came time to sell the real estate, our client entered into a standard real estate contract and then couldn’t get the title company to approve title, simply because the Manager of their LLC was not longer available to resign from the management position properly and/or approve the deal. Because of this, they missed the deadline to close and were ultimately sued by the purchaser of the real estate for close to a hundred thousand dollars.

In Summary

It’s actually quite easy to “trick” a state’s Secretary of State, by submitting false information or doing some sort of “straw man” or “bait-and-switch” with owners or managers. The problem is, it’s not so easy to trick a plaintiff’s attorney and/or a judge. They will see through this in a heartbeat and worse, use it against you to show why it’s justified to remove the liability protection you are otherwise depending on with the LLC.

Worst case, you could find yourself either reliant on or subject to some unknown third-party you used to help form your LLC years ago, and now they are either unavailable to help clean up the mess or they are acting against you in some nefarious way.

At the end of the day, it’s best to do it the legal and proper way. To maintain your anonymity, you form a regular LLC as an operating company in the state you’re doing business (the child), and that operating company should be owned by an anonymous LLC as a holding company (the parent). You own the parent. There are very few other legitimate ways to accomplish this, yet maintain a strong corporate structure to protect you from lawsuits and personal liability.

We built an “Entity Selection Tool,” that helps folks figure out how to navigate the right way to maintain anonymity in a state. It also considers tax issues (including the Trump Tax Reform Act of 2017) and other important issues we see time and time again. It takes 5 minutes. Check it out at:

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