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. #Asset Protection #Small Business
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Reference: Forbes (April
30, 2013) “The Misunderstood Charging Order”