Don’t Get Mislead by the Corporate Shield Or Charging Order Protection.

Date : 28-Feb-2008

The new “HOT” Asset Protection vehicle is to use limited liability companies to hold title on protected assets which are managed by a corporation. The self-proclaimed Asset Protection expert's reason that this is “perfect protection”.

They sell this illusion by assuring you that the LLC provides charging order protection. By way of explanation, these gurus point out that the charging order protection means that a creditor cannot get to the assets held by the LLC. Instead, the promoters point out that all the creditor will get is a charging order, which is a right to get the assets if and when the manager of the LLC decides to distribute the assets (cash or in kind).

These same gurus point out that the protection is compounded by using a corporation to manage the LLC because the “corporate shield” offered by the corporation will shield its owners and operators from liability, often going so far as to promise that the corporation protects the humans who manage and normally own it from suit.

This is ALL hogwash based on half truths. It sounds good, but it is garbage. LLCs, corporations and my favorite, family limited partnerships, are nothing more than a good start. Alone, they do not offer solid Asset Protection. If somebody says they do then you are being sold a bill of goods.

HERE’S WHY.

First, the corporate shield does not protect the managers of the corporation from suit. The reason why is simple. With a simple, small company (whether it is making hundreds of thousands or millions) the people who control the entity (whether it is a partnership, LLC or corporation) are responsible for any and all bad acts of the company.

IN SHORT, the “corporate shield” with small companies is nothing but an illusion.

Second, charging order protection is not reliable. MANY judges are just sick and tired of the abuses. Too many doctors have put their assets into a LLC, run away with their scrub nurse and then attempt to shield these assets from the soon-to-be-ex spouse as well as other creditors by the much touted charging order. Judges have learned to cut through this with ease. Charging order protection sometimes works, but not always, and it is never dependable. So, it is never wise to trust your net worth to charging order protection.

Third, all the promoters selling LLCs (sometimes with the corporate add on) fail to point out that any creditor of the owner of the LLC or corporation can acquire title to the stock or membership interests of the LLC. These guys conveniently forget to tell you that you can easily lose your ownership right in the LLC and corporation if you are sued…and since the corporate shield will not protect you from suit or judgments, this risk is very real.

THE BOTTOM LINE: As long as the people who control the company are also held responsible for the bad acts of the company, a creditor can gain ownership and control of the LLC and corporation.

For example, if you incorporate a roofing business and it does something bad (like installing tiles incorrectly) the President of the company (the Big Boss in Charge) is also going to be held responsible for an error. If you run a normal small company, you are responsible for its errors even if you are incorporated…period. You can count on being a defendant.

Just remember, with many privately help companies the people who own the stock also run the company. These folks are PERSONALLY responsible for errors of the company because the had the power to stop the harm and arguably they are the people who approved the company acts which caused the harm.

So: DON’T COUNT ON THE CORPORATE VEIL AND CHARGING ORDER PROTECTION TO SHIELD YOU FROM LIABILITY.

With this said, I still like and use these entities. FLPs, LLCs and corporations are valuable and good entities when used correctly. They normally are very important with most Asset Protection Plans, but they are not fool proof. They are a GOOD START and become very valuable and important when combined with other Asset Protection tools such as Asset Protection Trusts.

Unfortunately, Asset Protection is just not that simple. Beware of the advice you get at the free weekend seminar. It is often very expensive.

Have a healthy and protected week.

ABOUT THIS EDITOR:

Rob Lambert, Founder and former law professor is considered to be foremost expert on tax compliant asset protection structures. A contributing editor to Lexus Nexus debtor creditors series of law books Rob's passion is implement client wealth plans that stand the test of time and hold up under duress.

Full Bio - Email Rob