Limited Liability Companies and Partnerships
Limited liability companies and partnerships are a staple of any asset protection plan. If properly structured, these entities can offer asset protection for liability concerns with regard to (i) the assets in the entities (such as rental real estate), as well as (ii) outside creditors (who are not related to the entities themselves) of the individual members/partners.
With regard to protections against liability concerns related to the assets held by the limited liability company itself, a prime example is in the context of residential and commercial rental property. If a catastrophic event occurs at a rental property that is owned in an individual's sole name, instead of in a limited liability company, the owner can be sued and the judgment creditor may be able to reach the owner's other assets, including bank and brokerage accounts and other real estate. However, if the property where the event occurred is owned by a limited liability company, the separate assets of the owner will not be subject to claims of the judgment creditor; instead, the creditor will only be able to reach the assets inside the limited liability company itself.
Limited liability companies and partnerships can also be used to protect a member's/partner's interest in the entity from being seized by his or her outside creditors. If a judgment is obtained against an individual who owns a membership interest in a multi-member limited liability company, the judgment creditor will be limited to obtaining a charging order against the debtor member's interest in the limited liability company. The charging order will enable the creditor to receive any distributions that the debtor member would otherwise be entitled to. However, if no distributions are made from the limited liability company to its members, the value of the charging order obtained by the creditor is significantly diminished. Notably, the creditor can neither take the debtor's membership interest nor reach limited liability company assets to satisfy the judgment.
In addition, many commentators believe that the creditor will be responsible for paying the income tax attributable to the membership interest over which it holds the charging order even if no distributions are made from the limited liability company to pay such taxes. Obviously, this potential tax treatment will make the charging order remedy very unattractive to creditors.
It must be noted that in the case of a single member limited liability companies, the creditor may not be limited to the charging order remedy. Indeed, in such cases the creditor may instead be able to obtain the membership interest itself.
If the limited liability company is not structured properly or does not contain key language in the company's operating agreement, the asset protection described herein may be limited or even unavailable. It is important to utilize a knowledgeable and qualified attorney to assist with the implementation of any such planning. You may contact the law firm of Weisman, Young & Ruemenapp, P.C. at 248.258.2700 for assistance with all of your business and asset protection planning needs.