Asset Protection Attorney: Asset Protection and Charging Orders - What They Are - How They Work
Asset protection is one of the primary purposes for creating a limited liability company ("LLC"). LLCs provide two types of asset protection: (1) protecting the members from the liabilities of the company (sometimes called protection from "inside liabilities") and (2) protecting the assets of the LLC from the liabilities of the members (sometimes called protection from "outside liabilities").
If an LLC owns a rental house and the tenant sues the LLC because they slipped and fell down the stairs, this is an example of an inside liability. The general rule is that the tenant can sue the LLC, but they cannot go after the assets of the members unless they can pierce the corporate veil of the LLC. Piercing the corporate veil is very difficult to do. The test for a piercing of the corporate veil may vary slightly from state to state, but generally the tenant must prove that the LLC is the alter-ego of the member, and that the member has not treated the LLC as a separate and distinct legal entity. Because the laws protecting the members from an inside liability are similar in every state, the asset protection against inside liabilities is similar regardless of where the LLC is filed.
If a member is a physician and is sued for malpractice, the creditor may attempt to go after the assets of the LLC in order to collect on the judgment. This is an example of an outside liability because a creditor of a member is seeking to get into the LLC through the member. The remedies available to a creditor of a member vary greatly from state to state. In some states, the creditor of a member has a right to foreclose on the members interest and become the owner of it. In other states, the creditor of a member is limited to a charging order. A charging order is a court order which requires the LLC to pay any distributions that otherwise would have been paid to the member directly to the creditor. A charging order is not a good remedy for a creditor because the creditor is only entitled to distributions if the LLC decides to make a distribution; a creditor cannot force a distribution to be made. Therefore, an LLC offers greater asset protection if it is governed by the laws of a jurisdiction that strictly limits the remedies of a creditor.
Most if not all states follow the "internal affairs doctrine" established by the United States Supreme Court. This doctrine says that the internal affairs of a company are governed by the laws of the state where the company is filed, not the laws where the business activities take place or where the members are located. In fact, most states have a statutory provision stating that the internal affairs of an LLC are governed by the laws of the jurisdiction where the LLC was filed. This means that if an LLC is filed in Alaska and a California resident sues another California resident who is a member of the Alaska LLC for a tort committed in California, the issue as to whether the creditor can get information or assets from the LLC is governed by the laws of Alaska and not the laws of California. In other words, the state where an LLC is filed is critical in determining the asset protection provided by the LLC from outside liabilities.
Another issue affecting the asset protection provided by an LLC is confidentiality. In some states, the members and managers of an LLC are required to be disclosed and included in the state records which are available to the public. In other states, the members and managers are not made a part of the public record. Many people feel that they have better asset protection if the identity of the members and managers are not made public.
Having studied the laws of every state in this regard, and having read many scholarly articles on the subject, it is my opinion that Alaska provides the strongest asset protection against outside liabilities because they not only limit the remedies of a creditor of a member to a charging order, but they also prohibit a creditor from obtaining a court order for inquiries, accountings or directions (see Alaska Statutes 10.50.380). Several other states expressly limit the remedies of a creditor to a charging order, which should also be sufficient to prevent a creditor of a member from collecting from an LLC.
When it comes to confidentiality, I believe that the New Mexico LLC is the best option because there is no public disclosure of members and managers and no requirement for the filing of an annual report.
Nevis is a country in the Caribbean that has the best LLC laws in the world. Nevis LLCs offer the strongest asset protection and confidentiality of any jurisdiction. Nevis LLCs can be created and maintained without excessive cost or complexity. Any business or assets can be owned by a Nevis LLC, wherever it is located. If you want the strongest asset protection available, I recommend a Nevis LLC.
If you want the best LLC within the United States, I feel that Alaska is the best option for asset protection purposes and New Mexico is the best for confidentiality of managers and members. Alaska has a convenient online filing system, but New Mexico has lower filing fees and zero annual renewal fees. In conclusion, it is important to note that the laws described in this article are apt to change from time to time. This article is provided for informational purposes and should not be used as legal advice for any specific situation. Readers are advised to seek competent legal counsel in designing and creating limited liability companies or engaging in asset protection planning.