Asset Protection Characteristics of LLCs

Limited liability companies (LLCs) offer the personal financial protection equivalent to that provided by corporations. This means that members of an LLC generally are not liable for its debts or liabilities. (By way of comparison, in a limited partnership, at least one partner must be a general partner who is liable without limitation for debts of the partnership.) But if the LLC fails to file articles of organization, state law may provide that the conduct of business activity causes the persons acting through the LLC (the LLC members) to lose their liability protection.

Caution: An LLC cannot be used to protect a member’s personal assets from that member’s illegal acts. Similarly, a professional LLC cannot shield its members from liability for errors, omissions, or misconduct related to the provision of professional services.

While the law on piercing LLCs to reach the personal assets of their owners is still developing, most commentators expect that the tests applied by the courts will be similar to those used in cases involving corporations. As with a corporate shareholder or limited partner, the LLC member’s liability to the LLC itself is generally limited to any required but unpaid capital contributions.

Although state law generally shields LLC members from liability for the LLC’s debts, there are situations where members will have personal liability. Under most states’ laws, when a partnership is converted to an LLC, the general partners remain jointly and severally liable for the outstanding debts of the partnership on the date of conversion. Furthermore, the LLC members may be liable for sales tax and other state taxes despite the limitations on their liability under the state’s LLC law.

In addition to liability protection, LLCs have an important asset protection advantage over corporations. A member’s creditors generally cannot gain full ownership of the member’s LLC interest. Instead, a creditor may be able to obtain a charging order, which conveys the right to receive distributions. But other ownership attributes, such as the right to vote or sell the LLC interest to satisfy the creditor’s claims, normally are not available to the creditor. In contrast, creditors of a corporate shareholder can obtain full ownership of the stock, generally without any restrictions on the ability to vote or sell the stock.

Please contact Martini, Iosue & Akpovi by phone at (818) 789-1179 if you have questions or want more information.

 

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