Considering that America is the most litigious society in the world, and there are over 18 million lawsuits filed in our court systems every year, it is no wonder that many of my clients are coming in these days wondering how they can protect their assets from some of these unjustified lawsuits.
What can you do to protect your hard earned assets from being taken away in these frivolous lawsuits? One of the easiest and best things you can do is to create what many consider to be the ultimate protection entity, the Limited Liability Company, or LLC.
An LLC is a form of business, not unlike a corporation or partnership. But unlike a corporation or partnership it offers many more advantages. All owners of an LLC are protected from liability caused by the LLC’s activities, as long as the member is not personally liable. In a partnership or sole proprietorship, the general partners and sole proprietor are always liable for the business liabilities. In a corporation there are filing dues and administrative procedures that must be carried out on an annual basis to keep the corporation in good standing. In an LLC there are no annual filing dues and the administrative procedures are much more flexible.
The LLC is formed when an attorney prepares the necessary documents and files the LLC with the state. Upon the LLC being filed, your existing assets are transferred into the LLC in return for a membership interest in the LLC. The assets in the LLC are now owned by the LLC, instead of by you. With your membership interest in the LLC and you listed as the manager, you control the assets in the LLC.
The key document that is vital in any LLC is called an operating agreement. The operating agreement is what gives the LLC all of the asset protection that one is looking for when transferring assets into the LLC. If the operating agreement is not properly drafted then the statutes of the state you live in is what you are going to rely on to give you the asset protection you are seeking from the LLC. The statutes only give bare bones protection. They do not give all of the protections that a good operating agreement can give, which will shield the assets from frivolous lawsuits.
If a creditor is successful in the lawsuit and the operating agreement is set up properly then the most a creditor can receive out of the LLC is something called a charging order. A charging order is nothing more then a letter from the judge telling the creditor they have the right to take any distributions that a debtor member would otherwise be allowed to take from the LLC. If the operating agreement is drafted properly the charging order is a hallow victory in that the creditor will not be allowed to interfere or manage the assets in the LLC. Because the creditor will not be allowed to manage the assets in the LLC they cannot force the manager of the LLC to make distributions to its members, thus the creditor receives nothing.
A properly drafted and operated LLC is a formidable deterrent to frivolous lawsuits. An LLC should never be created to defeat an existing creditor, therefore the sooner you create your LLC, the more peace of mind and protection you and your family will have should you become subject to one of these unjustified lawsuits.
To understand more and to see if an LLC is a good fit for you, call 888.222.1328 to schedule a free consultation with an estate planning attorney.
Contributed by Phoenix and Arrowhead Estate Planning Attorney & Partner David T. Eastman
Morris Hall Can Protect You in Today’s Litigious Society:
We live in a litigious society, where over 1 million lawsuits are filed every year in America alone. Financial predators are looking for ways to take funds from others and often use litigation as their means to do so. At Morris Hall we provide your assets and your loved ones with important protections that can prevent financial predators from taking advantage of you. We do this through proper and current estate planning techniques. With an MH living trust, we can also protect your property, assets and loved ones from probate, estate taxes, gift taxes, creditors, Medicaid spend-down, conservatorship or guardianship proceedings, ex-spouses and more. A living trust also keeps your asset and beneficiary information private and secure to avoid giving financial predators information to use against you and your family. Without a living trust, this information will be made public. For those living in Arizona, we serve the areas of Phoenix, Mesa, Gilbert, Fountain Hills, Scottsdale, Prescott, Flagstaff, Sedona, Tucson, Sonoita, Arrowhead, Avondale, Goodyear and Tempe. In New Mexico we serve the areas of Albuquerque, Santa Fe, Las Cruces, Rio Rancho, White Rock, Alamogordo, Truth or Consequences and more. Contact us today at 888.222.1328 to schedule an appointment with an attorney in your area!
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.