Every investor worth their salt knows to protect their assets with a Limited Liability Company (LLC). Chances are, you’ve got one or more LLCs and are leveraging their accompanying tax advantages. You’re also well aware of the liability protection that an LLC provides. Like I said, you’re a smart investor.
But here’s something you may not know: LLCs come with Charging Order Protection. Even in an LLC, members’ assets are still potentially at risk from creditors and judgments. And let’s face it, successful businesses are claim magnets, especially if you have outstanding debts or judgments elsewhere.
The key point of Charging Order Protection is to protect your business and its assets from the debt of any of the LLC members. With it, a creditor of a member of an LLC cannot put a claim against the assets of the LLC, but can only obtain a charging order against distributions made to the member under judgment. This protects the assets of the LLC itself as well as its members.
However, a creditor cannot force the LLC to make a distribution to its members. This may leave the creditor with nothing from the LLC and gives the member under judgment a strong negotiating position to settle with the creditor for less than the whole debt. This last point, however, depends upon the situations of both the creditor and the member.
Say, for example, that the creditor is another individual that needs the proceeds of the settlement. She will likely be willing to settle the debt at a discount. On the other hand, if the creditor is a bank, the bank will likely not need to have the money in hand at any specific time and so may be less inclined to settle.
But what about the halt in distributions to the member(s) of the LLC? It’s true that a creditor can’t compel a distribution, but the member(s) may be reliant upon distribution for financial viability. In that instance, the possibility of discounting the debt will depend on who needs the money more.
Also, different states enforce the Charging Order with varying levels of vigor, so be sure to speak with your legal team about domiciling your LLC in the proper jurisdiction. Either way, the Charging Order is an essential component to protecting your assets and a key benefit to any properly structured LLC.
Daniel Kalenov led Global Diversified Partners goal is to be the investment firm of choice for individuals seeking to diversify their portfolios into tangible assets, not just paper ones. When it comes to your finances, if you don’t know where you’re going, any road will get your there. Global Diversified Partners, partner with you to re-claim your decision making, and ultimately your future.
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