Experienced Asset Protection and Business Planning Attorney Explains Charging Orders
When choosing a business entity for asset protection it is important to determine which entities have charging order protection. Charging orders require a creditor to "stand" in the shoes of an entity owner as oppose to being able to foreclose on the business interest and/or force dissolution. Thus, with a charging order, the entity owner can withhold distributions and make the creditor wait indefinitely for a payout. In today's day and age, the limited liability company ("LLC") is one of the best entities for asset protection because of its built-in charging order protection.
1. Charging Order Defined
In most states, the personal creditors of a business owner are limited to one of three remedies. First, a creditor can obtain a court to order that the business entity pay the creditor all the money due to the entity owner/debtor from the entity. This is more advantageous to the business owner who can withhold distributions from the creditor. Second, a creditor can foreclosure on the business interest. Third, a creditor can obtain a court order to dissolve the entity. The second and third options clearly favor creditors. It is important to ensure that your business entity choice provides that the creditor's sole remedy is a charging order and not foreclosure and/or dissolution.
2. Recognize why the
The limited liability company is a great asset protection tool because, in most states, the charging order is a creditor's exclusive remedy for repayment of debt. This makes the LLC very debtor friendly in general. In these debtor friendly states, creditors who pursue and obtain charging orders end up with nothing because they can't order the company to make any distributions.
3. Distinguish which Limited Liability Company State Laws are Not Debtor Friendly
While the LLC is one the best asset protection tools, some states still allow creditors the remedies outside of the charging order. About two-thirds of
4. Understand which States Require Multi-Member LLC Ownership for Charging Order Protection
Some states stipulate that single member limited liability companies are not protected under the charging order laws, even in states where the exclusive remedy is the charging order. Two of such states include:
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