Charging Order Plus: Another Layer of Asset Protection

In some states, limited liability companies (“LLCs”) and family limited partnerships are protected by charging order statutes.  A charging order is a judicial remedy that can be used by a creditor to collect from a debtor who owns an interest in certain types of business entities.  Charging order statutes limit the recovery that a creditor can make with respect to a debtors interest in an LLC or family limited partnership.  Specifically, a charging order limits to the creditor’s recovery to distributions from the LLC or partnership, thereby preventing creditors from ever owning any actual interest in the business or having any say in business decisions.

Olmstead’s Legacy and Hybrid Charging Orders

We’ve written about the Olmstead case down in Florida and the legislation that resulted from that particular case, which essentially creates a huge distinction between single-member LLCs and multi-member LLCs for asset protection purposes.  In essence, the new Florida law states that charging orders are the exclusive remedy for multiple member limited liability companies, but the statute permits more invasive creditor action with respect to single-member limited liability companies.

The problem with Florida’s new statute is that it’s often not feasible to have a multi-member LLC.  There are the issue of finding people you want to be in business with, trust, and capital contributions to consider.  Besides all that, even if you started an LLC with your spouse as the other member, who is to say that a court won’t regard that as a single-member LLC, especially if the membership interest is owned as tenants by the entireties?  Of course, there is no case law and no guidance on this issue in Florida, and that creates uncertainty.

Asset Protection in Every State

Setting aside the new distinctions created by Florida asset protection legislation, there are a few things you can do in any state–whether your state is a charging order jurisdiction or not–to deter creditors from attacking your single-member LLC.  The first suggestion is to appoint a permanent manager that cannot be changed.  Of course, you would want to name yourself to this position and specify a particular rate of compensation in the LLC operating agreement, so that if a creditor does successfully obtain ownership of your LLC, you’ll still run the business.  The second thing you can do is to specify a set rate of annual distributions for tax purposes in the operating agreement, even if no actual distributions are made.  Coupled with your permanent management of the LLC, this will have the effect of deterring creditors, because they run the risk of incurring tax liability but no cash.

There is no guarantees that any such provisions will be upheld by a court, but it doesn’t hurt to add as many layers of protection to your plan as possible.  Ultimately, the only absolutely secure form of protection comes from using offshore asset protection trusts, which is why all of our plans make use of an offshore strategy.