How Does Having an LLC Protect My Assets?

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QUESTION: I would like to protect my small business assets from those who might file frivolous lawsuits like slander, personal liability, etc. Is a LLC the best option to protect small business assets?

ANSWER: For most assets and businesses, a Limited Liability Company ("LLC") is your best option. Similar to other limited liability entities, so long as proper accounting and other formalities are followed, LLC's and Corporations both offer asset protection from Company creditors and judgment holders (i.e., inside creditors).

Unlike Corporations, however, LLC's also offers unparalleled asset protection from personal judgments and creditors (i.e., outside creditors).

So, if someone were to win a lawsuit against you personally, they could not take away the assets inside the LLC.

Setup properly, what the personal creditor would receive is a "charging order" against your Membership Interest.

A charging order does not give the creditor management rights over the LLC. At most, they would be entitled to any distributions made out of the LLC, if any.

It is strictly up to the LLC Manager whether or not to make distributions.

Let's say the LLC made $50,000 in profits and you (as the Manager) decided to keep it all in the LLC and reinvest it. In other words, no distributions were made.

The creditor holding the charging order cannot participate in management, and therefore, cannot force a distribution or liquidation of the LLC assets. In addition, there is a strong possibility if the charging order is foreclosed on, the creditor would owe the IRS income tax on any Company income. Ouch!

Because a properly setup LLC's prevents outside creditors from interfering with management,and limits a Member's creditor to a charging order remedy, when faced with a LLC, lawyers usually encourage their clients to settle their claim rather than face the uncertainty and waiting-game imposed by LLC charging orders.

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