Nevada LLC for Personal Asset Protection


A Nevada Limited Liability Company (Nevada LLC) can offer some good Personal Asset Protection both from the “front end” (protecting you, the business owner individually, from the business liabilities) from the “back end” (protecting your equity ownership interests and what the LLC owns from your own future potential personal judgment creditors).  To clarify, when we are talking about “back-end” protection, we are talking about the protection of your equity ownership interest in the LLC (called a “Membership Interest” – which is essentially the same as being a Stockholder in a Corporation) and the protection against a Judgment Creditor being able to get at the assets of the LLC.  This is all too often the part that gets left out of the strategic business structure planning.  But it is a very important piece of the full asset protection planning picture.

Just how strong the LLC’s back-end protection is depends on the jurisdiction of the LLC. Nevada, in particular, offers the best LLC back-end protection available, because the Nevada Statute specifies that the Charging Order is the exclusive remedy of a Judgment Creditor – and that remedy in Nevada is essentially a sit-and-wait-and-hope-the-LLC-is-dumb-enough-to-make-a-distribution-remedy.  Specifically, the Judgment Creditor of a Nevada LLC member cannot foreclose the Charging Order (which is essentially a lien) or exercise any other remedy against the LLC or the membership interests. The Judgment Creditor does not cede to any rights of the LLC member other than the right to receive the distributions made from the LLC when, and if, a distribution is made to the member that is the Judgment Debtor.  The Judgment Creditor cannot force any distribution of profits. Hence, if no distribution is made, the Judgement Creditor receives nothing.  The members and/or managers of the LLC can stay in control of when distributions are made (be careful to pick a good jurisdiction like Nevada for your LLC formation, because in some states where the Charging Order is not the exclusive remedy, they door may be open to foreclose the lien/charging order or to exercise some other remedy).

There is a big disincentive for a Judgement Creditor to want to get a Charging Order.  This is because the Charging Order gives the Judgment Creditor the right to receive the distribution of profits made to the Judgment Debtor member of LLC when such distributions are made.  Due to that fact, the IRS has taken the position that the Judgment Creditor with a Charging Order has become the “financial member” of the LLC.  This is problematic for the Judgment Creditor, because the LLC, by default, is a “flow-through” tax entity (net profits and losses “flow-through” to the members and are attributed to the LLC members, regardless of whether or not any actual profit distributions are made).  What this means for the Judgment Creditor is that, if there is a net profit made in the LLC, the Judgment Creditor that has a Charging Order against an LLC member’s membership interest may end up pay taxes on profits that the Judgment Creditor will likely never see (IRS Revenue Ruling 77-137) because the member’s share of the net profit from the LLC is attributed to the financial member.  Therefore, no Judgement Creditor in their right mind would want to risk getting a Charging Order.  This effectually translates into protection from liens against your right as a member of the LLC to receive distributions of profits from the LLC.  (this is commonly referred to as the “K-O by the K-1”)

The “good” part of the LLC back-end protection is that Judgment Creditors can’t seize the membership interest in the LLC.  The Judgment Creditor is also prevented from forcing or taking the profit distributions, foreclosing against the lien, voting the LLC member’s voting interests in the LLC, or from exercising any other remedy against the membership interest (this is particularly true in Nevada where the Nevada LLC law makes the “sit and wait” charging order the exclusive remedy for the Judgment Creditor.  The Judgment Creditor is also prevented from getting into the LLC to get at the assets of the LLC.

The limitation of the LLC Asset Protection is that a Judgment Creditor (either with a charging order or a ready garnishment) can effectually prevent you taking your money out of the LLC to yourself where you can use it for your personal needs (and using LLC “business” money to pay personal expenses can put LLC assets at risk to attempts by the Judgment Creditor to do a reverse veil piercing).

So, bottom line is that an LLC is a good first step to Personal Asset Protection.  Having a Nevada Asset Protection Trust own the LLC membership interest for you puts you in far more secure position.