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LLCs, Corporations and Partnerships – Hors d'oeuvres at Best.

By Rob Lambert - Email Editor

Date : September 11, 2008

Dear Valued Reader,

One of my favorite quotes is from the In re Turner case in which the judge said, “Asset protection is not illegal and is honored by the law if done for a legitimate purpose.”  Yes, properly done Asset Protection keeps your “stuff” safe.  In the last ten years there are finally many instances where Judges and State Legislators have overtly blessed Asset Protection Planning.  Finally, our right to protect our family is formally recognized. 

Immediately following the sentence blessing Asset Protection, the same judge goes on to make a completely misleading statement.  He says: “…For example, an individual may do business through a corporation or limited liability company and will not be held personally liable for the debts of the entity.”  The judge focuses on what we all thought was black letter law: A corporation (same with LLC’s) will insulate the shareholders and members from the obligations of the entity.  

Unfortunately, this is simply not true in practice. 

This black letter law’s fundamental precept is wrong.  

The truth is that with almost every small corporation or LLC, the member/shareholder is also involved in the management of the entity.  As such, the member/shareholder is sued PERSONALLY each and every time any creditor goes after the entity.  Count on this, if you manage the entity, you are potentially responsible for its debts.  PERIOD. 

The much touted corporate/LLC veil is nothing but an illusion in the real world of hungry creditors suing to collect debts.  The shield is imperfect at best when the rubber hits the road. 

In your travels through the seemingly unending promotion of LLC’s and Limited Partnerships (commonly called Family Limited Partnerships (FLP) just to make them more expensive!) you probably have also found them constantly touted as stand alone Asset Protection entities.  The argument goes: “Why bother with other forms of expensive protection when we can sell you some $200 LLC for $2,500 and your money will be safe.”  The argument goes that these entities not only offer the debtor protection of a judicially recognized corporate veil (you already know this is B.S.) but they offer charging order protection. 

Next week I will discuss what charging order protection is and just how effective it is in practice.  I will deal with the issue of when you should and when you should not rely on charging order protection. 

Finally, once I have covered charging order protection I will touch on what these very valuable entities are really good for.  I use them all the time… but for all the right reasons (one of which is not the much touted but seldom delivered veil of protection). 

Have a healthy and protected week.

Rob Lambert

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