Missouri Real Estate Lawyer

The main reason for setting up an LLC is to protect your personal assets from claims against your business.  However, the reverse concern is of equal importance: protecting the assets of the LLC from claims against you by outside creditors.

Charging Order and Outside Creditors

Protecting LLC assets from outside creditors is especially important for members of a multimember LLC.  If you make a contribution to a multi-member LLC, you certainly don’t want that contribution to be seized by someone outside of the LLC who gets a judgment against one of the other members.  Thankfully, most states, including Missouri, agree that outside creditors generally should not be able to seize LLC assets to satisfy a personal judgment against a member.  Instead, outside creditors are typically limited to a “charging order”, which attaches only to distributions made to the member against whom a judgment is entered.

The judgment creditor cannot force a distribution pursuant to a charging order.  Instead, the LLC is obligated to pay the member’s portion of a distribution into court only if and when the manager or member of the LLC decides to cause the LLC to make a distribution to its members.  If no distribution is ever made, no money ever need be paid into court.

The charging order concept arose to protect the LLC members who were not a party to a judgment against another member.  Most courts agree that the members who were not part of the judgment would suffer an unfair loss if an outside creditor could seize the assets of an LLC to satisfy the judgment entered against a member personally.  However, some courts have held that this rationale for limiting recovery to a charging order is less relevant when the LLC is owned by just one member.  Since there are no interests of other members to protect, some courts have held that the outside creditor should not be limited to a charging order when it comes to assets of a single member LLC.  These courts have in some circumstances permitted the outside judgment creditor to seize the assets of the single member LLC to satisfy a judgment entered against the member personally.

Add a Partner as Protection Against Outside Creditors

Therefore, if you are the sole member of your LLC, or if you’re thinking about forming a single member LLC, you should consider forming it as a multimember LLC in order to provide an additional layer of protection to LLC assets against outside creditor claims.  As with most asset protection measures, this strategy is more akin to a firewall.  Firewalls are not always impenetrable, but they reduce the risk of disaster.

Spouses, adult children, other relatives and close friends can often be trustworthy business partners.  Adding at least one other person as a minority member of your LLC will reduce the risk of LLC assets getting burned by outside creditor claims.

The information contained in this article is for informational purposes only and is not intended as legal advice. Your circumstances are likely unique, and you should therefore consult with legal counsel prior to implementing any of the concepts discussed in this article.

Michael Sewell, MBA and JD, has practiced law in Missouri since 2005, and he is the owner of Sewell Law, LC, which helps clients with business formations, private securities offerings, and litigation.

Feel free to contact Michael through www.stlouisllcattorney.com.

This article was published on June 21, 2015.

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