CHARGING ORDER PROTECTION

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The protection of assets is generally one of the biggest reasons to form a legal entity. Specifically, the protection of business assets from an owner’s personal liabilities is critical to a business’ continuing success. In many states, a personal creditor may charge a stockholder’s stock with payment of a judgment. Such a remedy could result in the forced liquidation of a viable business to satisfy an owner’s personal debt to the detriment of other owners.

 

In Nevada, charging order protection is extended to partnerships, limited liability companies and corporations. What this means is that a personal creditor’s only remedy against an owner’s stock is a charging order and, as a result, that creditor must wait for distributions from that entity to satisfy any judgment. The creditor cannot force distributions from the entity, nor can the creditor exercise any control over the entity; thereby allowing the business to continue operations despite the creditor’s claim.

 

LLCs and Partnerships

 

Nevada has long recognized charging order protection for limited liability companies and partnerships, but there has always been a question as to whether that protection extended to single-member LLCs. The case law leaves some doubt and more recent decisions appeared to be chipping away at a member’s ability to protect its membership interest if the LLC was a single-member LLC.

 

To remedy this, in 2011 the Nevada legislature addressed this issue and provided that “the exclusive remedy by which the judgment creditor of a member or an assignee of a member may satisfy a judgment out of a member’s interest of the judgment debtor, whether the limited liability company has one member or more than one member.”

 

Corporations

 

Nevada was the first state to provide charging order protection to certain corporations under NRS 78.746. This provision provides the exclusive remedy available to a judgment creditor from a stockholder’s stock. The judgment creditor is only provided the rights of an assignee of the stock and has no rights to management or control of the corporation, provided that the corporation meets the following requirements:

 

  • Has less than 100 stockholders of record, at any time;
  • Is not a subsidiary of a publicly traded corporation or subsidiary of the same; and
  • Is not a professional corporation

 

These restrictions closely mirror the IRS limitations for s-corporations and include most small businesses.

 

Conclusion

 

The expansion of these rights to these types of entities helps to continue Nevada’s business friendly reputation. However, it is unclear when and if other states will follow suit with similar legislation, which leaves the answer unclear as to whether this law will be respected outside of Nevada.

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