LLC’s, LP’s and LLP’s

Limited Liability Companies are usually associations of 2 or more people carrying on a business and dividing profits.  They combine the pass-through tax aspects of Limited Partnerships and affording the limited liability of corporations.     Thus, they can avoid the double taxation that corporations suffer.  While there is a uniform statute for LLC’s (Uniform Limited Liability Company Act or ULLCA), each state has its own unique set of LLC laws.

Some states offer statutory protections against foreclosure and allowing only charging order protection, while some states don’t allow for charging order protection.  It is therefore essential for asset protection planning purposes that your LLC be situated in a state that affords the most protection.  In light of a new Florida court decision that allowed creditors to attack LLC assets, if you have a Florida LLC and wish to be easily converted to another state, like Wyoming, that offers statutory protection you should consult with us immediately.

LLC’s are formed for various reasons and with a carefully drafted Operating Agreement, you can:

  • provide asset protection
  • reduce estate tax
  • reduce family income tax overall
  • allow senior family members to give away yet keep control of their assets
  • increase gifting amounts by allowing LLC interests to be discounted
  • create a prenuptial agreement for children

Some states limit creditor rights to charging orders and do not permit foreclosure while other states permit foreclosure of the debtor partner’s interests.  Creditors of LLC’s members must:

  • First litigate and obtain a judgment against the debtor partner
  • Then, obtain a charging order from the court
  • Then, have a receiver appointed to receive distributions from the LLC
  • If no distributions are to be made, apply to the court to foreclose on the debtor partner’s interests

In light of recent decisions where charging order did not protect debtors in single member LLC’s it is important to have non-debtor members. See In re Ashley Albright, 291 B.R.  538 (Bankr. D. Colo. 2003) (in which the court allowed the trustee to become a substituted member but stated that its decision would have been different if there were non-debtor members interest that would be affected).