Articles Posted in Limited Liability Companies

Client presents with a single member limited liability company. The emerging case law is that single member LLC’s are not entitled to charging order protection. This makes sense since the original purpose of the charging order remedy was to protect partners in a partnership from being forced to accept a bankrupt partner’s creditors as their new partner. However, since a single member does not face that risk, there is no need for the charging order remedy and courts in several states have held that creditors can foreclose the interest and sell the LLC’s assets to pay debts. Although no case in Michigan has yet held that creditors of a single member LLC can foreclose on the assets of the LLC to pay the member’s debts, it is this author’s opinion that it is only a matter of time and Michigan asset protection planners need to figure out how to protect the single member’s membership interest from creditor claims.
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Although their styles may differ, most asset protection planners will approach their initial client meetings in much the same way. We will listen to the client’s concerns and determine if the client has existing or identifiable future creditors or if the client, with no creditor issues at all, simply desires to be prudent and adopt a plan that will protect his assets from unknown future creditors. We will also carefully review the client’s assets and income streams to ascertain which ones are free from creditor claims and which may be vulnerable.
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My April 20, 2010 blog discusses how the IRS avoids being subject to the charging order remedy when seeking to collect from an LLC in which the debtor taxpayer is a member. Unfortunately, the IRS has still another offensive weapon when chasing members of LLC’s for money.
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I know that many Michigan asset protection planning attorneys mistakenly take for granted that what I am about to say is common knowledge, but utilizing limited liability companies to hold commercial real estate and residential rental properties is an invaluable tool to protect your assets. I spoke with a prospective new client recently and was surprised to see that this sophisticated businessman who owns more than 100 commercial and residential rental properties throughout Michigan holds all of these properties in his sole name.
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Michigan Asset Protection Lawyers constantly extol the protection that Michigan limited liability companies provide debtors as a result of the charging order remedy. As the story line goes, a creditor with a judgment against an LLC member of a multimember LLC cannot reach LLC assets directly. Instead, it obtains a charging order and distributions otherwise payable to the debtor member must now be paid directly to the creditor. Since the debtor often has influence over whether distributions are made, this gives the debtor a negotiating opportunity with his creditors. However, in the real world the charging order may not be as powerful as advertised.

In dealing with the IRS, you frequently see the government attempting to collect debts owed by members of LLC’s by levying directly on the assets of the Michigan LLC. How can the government do this you ask. Isn’t the government bound by the charging order rules under Michigan law? Indeed the government has acknowledged in published notices that in the case of multimember LLC’s it will honor the charging order rules…so what gives?
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