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A Delaware LLC or Wyoming LLC properly arranged for the charging order
protection is uncommon. Most people have a false sense of security
about their LLC because of misuse. We are going to start at the
beginning. The charging order protection with a Delaware LLC or
Wyoming LLC is comparable. But the Wyoming LLC will cost less
because of the difference in filing fees. Let's start at the
beginning...
LLC= Taxation As Partnership + Limited
Liability
LLC Taxation As
Partnership
Partnerships are
“pass-through” entities for tax purposes. This means that partnership
income, deductions and other items passes through the partnership
directly to the partners. Accordingly, each partner takes into account
his or her share of partnership income, deductions and other items in
determining the partner’s individual tax liability.
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Partnerships have
partners. |
Limited liability
companies (LLC) have members. The ownership in the LLC is called the
“member interest.” |
If a judgment is awarded against the LLC itself, it may be levied,
and LLC’s property seized or sold in payment. If, however, a
judgment is awarded against a member, to the extent that the operating
agreement so states, distribution usually cannot be compelled to satisfy
a member’s judgment debt. Creditors have to satisfy themselves
with a “charging order.” This gives them the rights to any distributions made by
the LLC to that particular member, but little else.
> LLC's are taxed as a corporation
or as a partnership. Taxation as a partnership is the default.
The Limited
Liability Of A Corporation
When a hostile
creditor sues the corporation, normally, it can only take the assets of
the corporation. The stockholders are generally not liable for the
debts, liabilities and acts of the corporation. This is called “limited
liability.” This is very different from a partnership, where all
partners are liable jointly and severally for everything chargeable to
the partnership
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Corporations have
stockholders. |
Limited liability
companies have members. |
The LLC has the
limited liability of a corporation.
The Limited
Liability Company (LLC) Is A Hybrid Entity
The LLC offers the
pass-through taxation of a partnership and the limited liability of a
corporation.
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CORPORATION |
LIMITED
LIABILITY COMPANY |
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A Corporation
can have one or more Directors and Officers. |
An LLC can have
one or more Managers. |
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The hostile
creditor can take your stock, if he can prove that you own it. |
The hostile
creditor can ONLY go after a member’s economic interest in the LLC
through the courts. This is called obtaining a “charging order.”
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Once the charging
order is obtained, the hostile creditor is now first line for any future
distributions that are usually paid out to the member(s).
Wyoming Statute 17‑15‑145. Rights
of creditor.
“…The charging
order is the exclusive remedy by which a judgment creditor of the member
or transferee may satisfy a judgment against the member's interest in a
limited liability company.”
The Assets Are
Made Unattractive To The Creditor
The manager of the
LLC can refuse to distribute the earnings. (If the operating agreement
so allows.) What is the advantage of withholding the distribution from
the hostile creditor?
This means that the
creditor is now liable for income taxes on those LLC earnings, whether
or not they’re distributed. The hostile creditor is now liable for
taxes on earnings not yet received or for what is typically referred to
as “phantom income.” This places the member in a stronger position to
negotiate a favorable settlement. Hostile creditors don’t want to pay
taxes on earned income that’s out of reach.
For this charging
order protection to be most effective, the LLC must
·
Have at
least two (2) members [Important!]
Managers can be people
or another business.
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Be taxed
as a partnership
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Be
managed by a manager, not the members. [Important!]
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