By Lee R. Phillips

I sent out an email a couple weeks ago about the Florida Supreme Court setting aside the “charging order” protection an LLC is supposed to offer.  I now apparently have a lot of students that have “sliced their wrists” and are bleeding to death.  (I faint at the sight of blood – not really – but please don’t do the wrist thing.)

Take a deep breath and step back from the edge.

The “charging order protection” protects the assets of the company from your personal liabilities and creditors.  If you have an accident on the street, the kid breaks his neck on your trampoline, or you get divorced, your personal assets are at risk.  The stock in your corporation and the membership interests in your LLC are personal assets.

If you have a corporation and your creditor gets the judgment against you, he will get the stock in your corporation.  Once he has the stock, he elects new officers and directors and controls the assets of the corporation.  He has your corporation and can sell the assets or do whatever he wants.

If you have an LLC, when your creditor gets the judgment against you, he will get the membership interests of your LLC.  BUT, the LLC is different.  The law says he can’t affect the management of the LLC, take the assets or do anything to disturb the LLC.  All the creditor can do is get a charging order, which is basically a lien against your membership shares.

If and when your LLC makes a distribution (pays a dividend), the creditor with the lien will get the dividend.  He will keep getting the distributions until his lien amount is paid off. (more…)

The Florida Supreme Court recently “set aside” a single member LLC and let the personal creditors of the LLC owner come directly against the LLC assets.  The creditor in the Olmstead case last month was simply given the assets of the LLC to satisfy the LLC owner’s debt.  (Actually, it was the government coming after Olmstead who was a bad dude.  So, the good guy won. Can the government be the good guy?)  Nonetheless, this means Florida has come out against the charging order protection that the Revised Uniform LLC Act says single member LLCs should enjoy.

The LLC is unique, because it gives you the “corporate shield” that protects the owners (members) from liabilities of the company, just like the corporate shield in a corporation protects the shareholders from the liabilities of the company.  Additionally, the LLC has an element of a partnership, because it protects the company from the personal debts and liabilities of an individual member by making the creditors of the individual get a “charging order” against the company.

If an individual owner of a corporation gets sued, goes bankrupt, gets divorced, or suffers any one of a dozen other “tragedies” in his or her life, the creditor (guy who won the suit, bankruptcy trustee, ex spouse, etc.) simply gets the stock the individual owned in the corporation.  If an individual owner of some IBM stock loses his or her stock, it is no big deal for IBM.  However, if an individual owner is the only owner of a small corporation and they lose their stock, then they lose the company.  The new owner of the stock simply votes out the acting officers and directors and takes over “ownership” of all of the corporate assets. (more…)

By Lee R. Phillips

I have students asking about establishing business credit. It’s a myth. As a small business, real estate investor, or general entrepreneur you don’t have a prayer of establishing “business credit.” You will always sign personally for any “credit” your business gets.

The major competitor I had in do-it-yourself asset protection packages went bankrupt a couple years ago. (Beware!  His products are still out there being sold by a half dozen groups. The products are out of date and there is no support – in spite of what you are told.) His company was a ton bigger than mine. It was doing tons of seminars, and the back end sales were huge (ruthless). He had signed personally for all of the company credit cards. That’s the only way you will ever get a business credit card. When his company went bankrupt, he was on the hook for over $10 million. NOT HAPPY! (Not a good asset protection technique either.)

You actually shouldn’t have a business credit card. They are dangerous. Just use a personal card for everything and then pay it each month the way the IRS wants you to.

Your personal credit card is governed by the Credit Cardholders Bill of Rights, but those laws don’t apply to business credit cards. BIG RED FLAG! (more…)