LLCs Are Under Attack


Lee R. Phillips,

Counselor United States Supreme Court

There are a ton of things you need to know and will find out about on my radio show.  Asset protection is becoming a more and more important part of your life – or at least it should be.  The law allows you to protect your assets from the financial and legal attacks that are sure to come.

If you can avoid just one or two of these legal “traps” during your life time, that’s the difference between retiring and being able to go on the cruise and retiring broke on social security for many people.

The law also allows you to make more money.  Think about it, the rich people you know use the law to turn bad deals into good deals.  They make money at everything they do.

If you want to be wealthy, you are going to have to use the law to “leverage” what you do to make money.  There are two sets of laws in the United States: one that rich people use and one that everybody else uses.  If you want to be rich, which set of laws do you have to use?

A lawyer only has a limited number of “tools” that he can use to protect you.  One of the most flexible tools is the limited liability company (LLC).  It has some great tax advantages, and it has superior “asset protection” qualities.  However, one facet of the asset protection it offers is under attack, if the LLC is a “single member” (one owner) LLC.

The Last Battle Was Lost?

The Florida Supreme Court recently Aset aside@ a single member LLC and let the personal creditors of the LLC owner come directly against the LLC assets.  The creditor in the Olmstead case last month was simply given the assets of the LLC to satisfy the LLC owner=s debt.

Actually, it was the government coming after Olmstead who was a bad dude.  So, the good guy won. Can the government be the good guy?  Nonetheless, this means Florida has come out against the charging order protection that the Revised Uniform LLC Act says single member LLCs should enjoy.

LLC Protection

The LLC is unique, because it gives you the Acorporate shield@ that protects the owners (members) from liabilities of the company, just like the corporate shield in a corporation protects the shareholders from the liabilities of the company.

Additionally, the LLC has an element of a partnership, because it protects the company from the personal debts and liabilities of an individual member by making the creditors of the individual get a Acharging order@ against the company.  Your advisors never discussed this aspect of the LLC with you when they set up your LLC.

If an individual owner of a corporation gets sued, goes bankrupt, gets divorced, or suffers any one of a dozen other “tragedies” in his or her life, the creditor (guy who won the suit, bankruptcy trustee, ex spouse, etc.) simply gets the stock the individual owned in the corporation.

If an individual owner of some IBM stock loses his or her stock, it is no big deal for IBM.  However, if an individual owner is the only owner of a small corporation and they lose their stock, then they lose the company.  The new owner of the stock simply votes out the acting officers and directors and takes over “ownership” of all of the corporate assets.

In a partnership, each of the partners is in the same boat.  Any act of one partner binds the others. (That’s why partnerships are so dangerous from a legal standpoint.)  Each partner is jointly and severally liable.

On the flip side of the coin, if an individual partner gets in trouble through a personal “tragedy” and loses their partnership interest, then the other partners suddenly find themselves with a new partner, who can unilaterally bind the other partners, shut down the partnership, and sell the assets of the partnership for their benefit – not a good situation for the other partners.

In order to protect the other partners the concept of a “charging order” was created under English law.  Once the creditor gets a judgment, then he has to get the charging order, which says that the new “partner” (creditor) can’t just come in and be a new partner with the ability to affect the partnership.

The creditor basically gets a lien against the “economic interest” that the partner lost in the judgment.  The creditor gets the benefit of any profit that is split up among the partners, but has no say in how the business is run and can’t access the assets of the partnership.

The Revised Uniform LLC Act says that LLCs, even single member LLCs, have not only the corporate shield protection for the member’s protection, but the LLC company has charging order protection from the individual member’s personal creditors.  That’s a great deal, and in some respects gives the LLC a decided advantage over the standard corporation.

States Where the Single Member LLC Is In Trouble

The Olmstead case may be a tipping point against single member LLCs.  Utah has already legislatively stripped single member LLC charging order protection, it is in doubt in Colorado after the Albright case, and now Florida has struck down the charging order protection and just turned the LLC over to the single member’s creditors.

Note, this does not mean an LLC doesn’t offer a “corporate shield” protection for the member from activities of the LLC.  It only means the personal creditors of the owners can use assets of the LLC to satisfy the debts of the sole owner of the LLC.

You need to seriously consider having someone else own some of your LLC.  I would say at least 5%, because that is the threshold the IRS uses for “significant” ownership of an LLC.  In most states a single member LLC still enjoys charging order protection from its owner’s debts, but the cases are starting to stack up against single member LLCs.

I am going to discuss the LLC and a number of the other legal tools you can use to protect yourself and make more money.  Listen In Below ..

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Lee R. Phillips

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