LLC for asset protection

How does an LLC protect my assets?

An LLC can protect my assets from creditors?

The LLC offers  a variety of protections that make it difficult to seize an individual’s interest in an LLC. Any creditors of an LLC member cannot force the sale of a member’s interest, though they are able to obtain a charging order. A charging order is a remedy at law that requires the limited liability company to pay the future distributions of income owed the member directly to the creditor. Thus, while the creditor is given the financial rights of the member via a charging order, they are unable to obtain either control of the LLC or the ownership rights in the company held by the member.

What is a Charging Order and how could it effect me?

Charging Orders tend to be a lot more trouble than they are worth to obtain. If the LLC member in question is the managing member or has membership rights in the company, then he or she makes the decision on when such distributions are made, or even if such distributions will be made. As the judgment creditor is unable to take over ownership rights in the company, they are unable to direct the distributions themselves. It is therefore possible to refuse to make distributions as long as a charging order is held against you. At the same time, while not making distributions, you are still able to pay yourself a salary for the services you provide to the company. Further, other types of compensation, such as loans, are beyond the creditor’s ability to garnish.

I can make my creditor pay my portion of the LLC’s tax bill?

Further, the LLC member’s creditor could be stuck with the member’s portion of the LLC’s taxes for the year. This can occur even if they haven’t received a penny by way of distributions. Under ordinary circumstances, the profits of the LLC pass through directly to the members for tax purposes. As the creditor, upon receipt of the charging order, stepped into the member’s financial shoes in the company, it stands that the creditor would receive the tax bill for the member’s profits, regardless of whether distributions of profits were ever actually made by the company. This only occurs under certain circumstances. Despite this, it creates enough risk that it acts as a creditor deterrent. Once deterred, they likely will not obtain a charging order to begin with.

Want to make sure this potential tax bill deter your creditor from pursuing a Charging Order? Make sure you draft your LLC Operating Agreement correctly. Some argue that the tax bill does not pass to the creditor because they don’t receive voting rights. would not pass to the creditor unless the voting rights of the member passed to the creditor along with financial rights pursuant to a legally obtained charging order, you want the Operating Agreement to be drafted in such a manner that it allows for an assignment of voting rights while at the same time taking care that these voting rights do not let the creditor force distributions of income, allow the creditor to replace the manager, or otherwise break down the protections the limited liability company offers.

When can a foreclosure of my LLC ownership interest occur?

There are states that allow foreclosure of a member’s interest in a limited liability company. This is because the charging order doesn’t provide a creditor with adequate protections at law. The remedy to this typically is legislation allowing a charging order to exist indefinitely. In such a case the charging order is able to survive after the judgment itself is settled. Business friendly states typically passed legislation that doesn’t allow a foreclosure of this type.

What other actions should I take to protect my assets?

Any number of things, to be honest. There are certain actions to be careful of if for all LLC assets to remain protected. Most states passed legislation regarding the fraudulent transfer of assets. The fraudulent transfer of assets a process, so here is an example. Say you buy a car, paying it off in full upon purchase. Then you transfer that car’s title to your LLC. Then your bank gets a judgment against you. Whether the bank can pursue the car depends on when you made the transfer. If you bought the car after you accumulated the debt resulting in judgment, your creditor can attach it. Should one buy the car prior to the debt, they are in the clear.

Will a bankruptcy change things?

Seeking bankruptcy protection sometimes becomes a necessity. The trustee in your bankruptcy may possess a greater right to claim your interest portion in an LLC than the holder of a charging order. This may be good or bad, depending on how you look at it and depending upon what action the Trustee chooses to take in obtaining value for your interest. It is possible that a carefully drafted Operating Agreement could curtail some of the powers granted to the Trustee over a member in bankruptcy, doing so by setting forth certain ongoing obligations to each member requiring them to serve certain services to the company. This in essence transforms the operating agreement into an executory contract. An executory contract places it under more favorably written bankruptcy law than the operating agreement. Unfortunately, no Operating Agreement can provide 100% protection to the member in bankruptcy.

FormCorporate.com provides a variety of Operating Agreements drafted specific to your needs that are designed to protect your assets in as many circumstances as possible, including the formation of a Delaware LLC and/or an LLC that can keep the members anonymous for additional protection. If you have any questions, just let us know asset protection is a priority when making your order.

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