Considering that America is the most litigious society in the world, and there are over 18 million lawsuits filed in our court systems every year, it is no wonder that many of my clients are coming in these days wondering how they can protect their assets from some of these unjustified lawsuits.
What can you do to protect your hard earned assets from being taken away in these frivolous lawsuits? One of the easiest and best things you can do is to create what many consider to be the ultimate protection entity, the Limited Liability Company, or LLC.
An LLC is a form of business, not unlike a corporation or partnership. But unlike a corporation or partnership it offers many more advantages. All owners of an LLC are protected from liability caused by the LLC’s activities, as long as the member is not personally liable. In a partnership or sole proprietorship, the general partners and sole proprietor are always liable for the business liabilities. In a corporation there are filing dues and administrative procedures that must be carried out on an annual basis to keep the corporation in good standing. In an LLC there are no annual filing dues and the administrative procedures are much more flexible.
The LLC is formed when an attorney prepares the necessary documents and files the LLC with the state. Upon the LLC being filed, your existing assets are transferred into the LLC in return for a membership interest in the LLC. The assets in the LLC are now owned by the LLC, instead of by you. With your membership interest in the LLC and you listed as the manager, you control the assets in the LLC.
The key document that is vital in any LLC is called an operating agreement. The operating agreement is what gives the LLC all of the asset protection that one is looking for when transferring assets into the LLC. If the operating agreement is not properly drafted then the statutes of the state you live in is what you are going to rely on to give you the asset protection you are seeking from the LLC. The statutes only give bare bones protection. They do not give all of the protections that a good operating agreement can give, which will shield the assets from frivolous lawsuits.
If a creditor is successful in the lawsuit and the operating agreement is set up properly then the most a creditor can receive out of the LLC is something called a charging order. A charging order is nothing more then a letter from the judge telling the creditor they have the right to take any distributions that a debtor member would otherwise be allowed to take from the LLC. If the operating agreement is drafted properly the charging order is a hallow victory in that the creditor will not be allowed to interfere or manage the assets in the LLC. Because the creditor will not be allowed to manage the assets in the LLC they cannot force the manager of the LLC to make distributions to its members, thus the creditor receives nothing.
A properly drafted and operated LLC is a formidable deterrent to frivolous lawsuits. An LLC should never be created to defeat an existing creditor, therefore the sooner you create your LLC, the more peace of mind and protection you and your family will have should you become subject to one of these unjustified lawsuits.
To understand more and to see if an LLC is a good fit for you, call 888.222.1328 to schedule a free consultation with an estate planning attorney.
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