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LLCs are treated the same from a corporate liability standpoint as S- or C-Corps in that professionals providing professional services still have personal liability when giving advice. LLCs also provide the standard corporate protection to shareholders and directors for negligence actions against the LLC itself.

Major Difference between an LLC and an S- or C-Corporation

The Charging Order

What is a Charging Order? A charging order is the ONLY* remedy a court of law can give a creditor who is trying to obtain the assets of a debtor when the assets are in an LLC or limited partnership. A charging order DOES NOT allow creditors to sell assets of the LLC or to force distributions of income. The best way to illustrate what a charging order does is to use an example. (Always check your state statute to make sure there have been no changes in the law since the publishing of this book.)

Example:

Creditor, Mr. Lucky, sues and obtains a $3,000,000 judgment against a professional athlete for an auto accident. The athlete has $1,000,000 worth of auto coverage and has the rest of his major personal assets owned by an LLC of which he owns 100%.

Mr. Lucky asks the court for satisfaction, and asks the court to have the athlete turn over the assets in his LLC to him. The court tells Mr. Lucky that the only remedy the court can give her is a “charging order.”

What does the charging order get Mr. Lucky in the above example? Only the right to pay the taxes on income generated in the LLC. (Explained below)

* Only a handful of states have solid charging order statutes. When using an LLC as an asset protection tool, it is vital to set one up in a state where a charging order is deemed the “sole” remedy of a creditor.