Doubtless a large motivation behind the formation of many LLCs, as with Limited Partnerships (“LPs”) is that an LLC has so-called “charging order protection”… The charging order is widely misunderstood, so let me try to explain it.
Choosing the structure of your business is about more than just taxation. You want a structure that protects you from liabilities of the business itself. In fact, the very structure of your business is a means to protect both you and your business, so it’s worth understanding and maintaining.
Have you heard of charging orders? These are legal wedges creditors use to try and drive a wedge between you and your business. If your business is an LLC (Limited Liability Company) or an LP (Limited Partnership), then there is more you should know about charging orders, as detailed in a recent Forbes article titled “The Misunderstood Charging Order.”
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.
Certainly there is much more to know on the subject of asset protection, to include the subject of company structure. Although some of this discussion can become tediously academic, it’s important to understand where and how your asset protection vulnerabilities can arise.
Reference: Forbes (April 30, 2013) “The Misunderstood Charging Order”