In this four-part series of blog posts we will get into the basics of using Limited Liability Companies (LLCs) as part of your asset protection plan. Today’s post is Part 1 and will give an introduction to LLCs. Part 2 – How is an LLC Taxed? will come out next week and will cover how an LLC is taxed. In Part 3 – Using LLCs to Own Investment Real Estate, we will discuss using LLCs to own investment real estate. Lastly, we will wrap up this blog post series in Part 4 – Downside to Using Florida LLCs, with a discussion about the downside to using Florida LLCs and a brief discussion of why it can be beneficial to use LLCs formed in other states as a part of your asset protection plan.
The limited liability company (“LLC”) has fast become the planning entity of choice in the U.S. The LLC allows its owners to achieve limited personal liability for the debts and potential liabilities of the LLC while being taxed on a relatively unrestricted pass through basis.
The LLC also protects its owners’ membership interests in the LLC from personal debts and liabilities unrelated to the LLC. In many states, LLC property and LLC interests cannot be directly seized or attached by creditors of debtor owners (“member”). Instead, such creditors are limited to a “charging order” issued by a court requiring the LLC to divert payments to the debtor member to the creditor until the creditor is paid in full.
The charging order does not permit the creditor to participate in management decisions nor does it give the creditor any voting rights, such as the right to vote for a distribution. If no distributions are made to the debtor member, neither are distributions made to the creditor.
Clearly, the existence of a charging order that prevents the LLC from sending distributions to the debtor member can be a severe problem for that member. However, dealing with the disruption of LLC disruptions is preferable to having the membership interest seized by the creditor.
What is a Limited Liability Company?
A Limited Liability Company, (“LLC”) is a special kind of entity authorized under state law which provides limited liability to its members much like shareholders in a corporation.
As a matter of terminology, the owner of an LLC is called a “Member.” An ownership interest in an LLC is called a “membership Interest.” The appointed Member or Members, individual, or entity with the ability to manage and control the LLC is called the “Managing Member” or “Manager.” The name of an LLC must end with the words “Limited Liability Company” or “L.L.C.” instead of “Inc.,” “Corp.,” or “Corporation.”
As with a limited partnership and under the laws of most states, a creditor of the Member cannot directly seize assets owned by the LLC. The creditor of a Member can only receive a “charging order” against the LLC. A charging order is an order from the court mandating that, if and when the LLC makes distributions, the distributions attributable to that Member whose interest is subject to a lien (the “Debtor/Member”), must be paid to the creditor.
A Debtor/Member can still receive compensation from the LLC without having to share any of that compensation with the applicable creditor. This charging order limitation makes an LLC superior from a creditor protection standpoint to a regular corporation, particularly for high- risk owners who have a possibility of a creditor claim being imposed against their ownership interest.
An LLC should not be confused with a limited partnership (LP), a limited liability partnership (LLP), or a limited liability limited partnership (LLLP), as these are completely separate entities with different characteristics. In some cases, one of these other entities will be preferable to an LLC and it may be feasible to convert one of these entities into an LLC or an LLC into one of these entities.
Check back next week for Part 2 in this four-part series about LLCs. If you are interested in using LLCs as part of your asset protection plan, give our office a call at (407) 273-1045. Our experienced attorneys can help you design an asset protection plan that meets your personal needs and goals.