Limited Liability Entities

Although traditional corporations are useful in shielding shareholders from the liabilities of the entity, a corporation provides little protection from the personal claims of creditors. Thus, a personal creditor with a judgment that is not related to the operation of the business may seize the debtor’s shares in a corporation and thus, control those shares and possibly the company itself. Over the last 30 years the use of limited liability entities such as limited liability companies (LLCs) and limited partnerships (LPs) have replaced corporations due in large part to asset protection considerations.

If the limited liability entity is structured properly, a personal creditor of a business owner that owns a membership interest in an LLC will be limited to obtaining a charging order instead of seizing the membership interest itself. A charging order is an equitable remedy which allows a creditor to receive distributions if made from the entity. A charging order would not carry voting or liquidation rights and a creditor that holds a charging order cannot control the limited liability entity.

For tax purposes, limited liability entities are much more flexible than corporations. A corporation can be taxed one of two ways: as an S corporation or as a C corporation. An LLC, for example, can be taxed as an S corporation or a C corporation, however, it can also be taxed as a partnership or it can even be treated as a disregarded entity if it has only one member.

Traditional corporations are becoming obsolete, and due to the asset protection and tax flexibility it is almost always more advantageous to operate a business or own property through a limited liability entity.

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