The Limited Liability Company is probably the most flexible entity to form as a Corporation. There are several reasons why we like this type of entity. The foremost is the protection it affords through Statute Law.
Charging Order Protection:
If a member with a percentage of membership in a Limited Liability Company is involved in a lawsuit for any reason and loses, the judge or jury may award damages to the other party. If this happens, the member will have to disclose their interest in the Limited Liability Company. A lien can be placed on any distributions that person may have be coming to him or her.
However, most attorneys will not have their clients take this kind of lien because of the potential tax consequences. Even if there is not a distribution issued the taxes on that distribution may follow the lien. In other words you get the judgment and win but you don’t get any money and you have to pay taxes as if you did, not a great strategy for the suing party.
Charging Order Protection goes both ways for the members in a LLC. If a lawsuit comes through from the personal side of a member the judgment can not force the liquidation of company assets to satisfy that judgment. On the other side, if a judgment is won against the company the assets of the company can be liquidated, however the personal property of the members can not be attacked to satisfy the judgment.
Nevada takes this one step further, in a LLC the member must vote unanimously to transfer any part of the membership. This means that everybody would have to agree that they wanted the suing party to be apart of the company. Hopefully this would not happen. The other side of that coin is that if you want to change the membership for what ever reason you would have to get written unanimous approval from all members even if that member holds only 1%. So chose your members carefully.
In short LLC’s unlike Stock held corporations have charging order protection. In the same scenario in a stock held corporation the judgment could seize the stock held by the suing party because it is considered personal property. Now you have the suing party as a stock holder.
The LLC’s have Charging Order Protection and can be taxed as a Sub Chapter S. This is cutting edge and most CPA’s are not aware of the process. Since this is true unless you are changing owners frequently we suggest using the LLC when ever possible. It is for better protection.
Last piece in the Incorporating Puzzle