Asset Protection and the Limited Liability Company (LLC)

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In terms of new formations, the Limited Liability Company (“LLC”) is the new King. The former King, the corporation, has been deposed, and relatively few corporations are now being formed other than for companies that have a future hope of being publicly-traded, or some other unique reason.

Business owners often focus on the tax consequences of business structure. But asset protection is a growing concern in these litigious times, leading to the rising popularity of “limited” forms of business such as the Limited Liability Company (LLC).

LLCs have a unique asset protection feature against charging orders. Maybe you have heard of these? A recent Forbes article titled “The Misunderstood Charging Order,” offers a basic explanation:

The charging order itself is not the lien; rather, the lien is what is placed by the charging order. Think of the charging order as a can of spray paint, and the paint is the lien. The charging order basically sprays the lien on the debtor/member’s interest. Stated differently, the charging order is the vehicle by which the lien is placed on the debtor/member’s interest — it is not the lien itself.

While this is a complex subject, basically a charging order is a creditor’s first and last tool to extract your interests and capital from your business (assuming they don’t try to pierce the veil). In a corporation, a charging order can allow a creditor to actually gain a debtor’s stock interests in the business. This can be disastrous. “Limited” company structures are specifically designed with charging order protection, something that could be important to you as a business owner. 

The original article goes into greater detail, but essentially the charging order protection means that while a creditor can place a lien on your LLC membership interests and claim any distributions, a creditor cannot claim the membership interest itself and sabotage the business.

While a “limited” company structure does provide a level of asset protection, keep in mind it is not a panacea. Do not just presume that a creditor will see an LLC and run away or settle for pennies on the dollar (as LLCs are often marketed), as that is rarely the case.  

Reference: Forbes (April 30, 2013) “The Misunderstood Charging Order

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