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Creditors of a partnership can only reach the partnership assets and the assets of the general partner, which is limited by using a corporate general partner which does not hold a lot of assets. Thus if, for example, you and your family owned three separate apartment buildings, it may be prudent to compartmentalize these assets into three separate limited partnerships, using one corporate general partner whose sole purpose is to manage all three LPs. If a litigious tenant sued over conditions at one of the properties, the other two buildings would not be exposed to satisfy any claims. This is an attack brought directly against the property, and will be discussed further in Chapter 5.

There is a second attack to be concerned with: One against not the LP itself but against the owner of the LP (or LLC).

Creditors of the individual partners can only reach that person’s partnership interest and not the partnership assets themselves. Assume you’ve gifted a 25 percent limited partnership interest in one of the apartment building partnerships to your son. He is young and forgets to obtain automobile insurance. Of course, in this example, he gets in a car accident and has a judgment creditor (a person who sued and won) looking for assets. This creditor cannot reach the apartment building asset itself because it is in the limited partnership. He can only reach the limited partnership distribution interest through a charging order procedure. A charging order allows the creditor of a judgment debtor who is in a partnership with others to only reach the debtor’s partnership distributions without dissolving the partnership. Charging orders are not favored by creditors because it forces them to wait to be paid. (Lawyers who take on contingency cases do not like to wait for payment, either.)

The state laws of Nevada and Wyoming offer the best charging order protections. California offers the weakest protection. A strategy then is to form your LP (or LLC) in Nevada or Wyoming and then qualify in California. (Qualifying is the process of registering your out-of-state entity to do business in your home state and includes paying the same annual fees as if you have started the entity in your home state to begin with.) An even better strategy is to form several LLCs in California and have them be owned by one Wyoming or Nevada LLC. By using a Nevada or Wyoming LLC or LP to hold your Home State LLCs you can obtain the benefit of a better asset protection law. This strategy is discussed further in Chapter 4.