Business owners often focus onthe tax consequences of business structure. But asset protection is a growingconcern in these litigious times, leading to the rising popularity of â€œlimitedâ€forms of business such as the Limited Liability Company (LLC).
LLCs have a unique assetprotection feature against chargingorders. Maybe you have heard of these? A recent Forbes article titled â€œThe Misunderstood Charging Order,â€ offers a basic explanation:
The charging orderitself is not the lien; rather, the lien is what is placed by the chargingorder. Think of the charging order as a can of spray paint, and the paint isthe lien. The charging order basically sprays the lien on the debtor/memberâ€™sinterest. Stated differently, the charging order is the vehicle by which thelien is placed on the debtor/memberâ€™s interest â€” it is not the lien itself.
While this is a complex subject,basically a charging order is acreditorâ€™s first and last tool to extract your interests and capital from yourbusiness (assuming they donâ€™t try to pierce the veil). In a corporation, acharging order can allow a creditor to actually gain a debtorâ€™s stock interestsin the business. This can be disastrous. â€œLimitedâ€ company structures arespecifically designed with charging orderprotection, something that could be important to you as a businessowner.
The original article goes intogreater detail, but essentially the chargingorder protection means that while a creditor can place a lien on your LLCmembership interests and claim any distributions, a creditor cannot claim the membership interest itself and sabotagethe business.
While a â€œlimitedâ€ company structure does provide alevel of asset protection, keep in mind it is not a panacea. Do not justpresume that a creditor will see an LLC and run away or settle for pennies onthe dollar (as LLCs are often marketed), as that is rarely the case.
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