Limited Liability Companies and Asset Protection

The limited liability company, or LLC, has been around now for many years and is commonly used for operating businesses, holding real estate and other investments.  The LLC is flexible, while still providing limited liability to the owners.  In other words, the owners (members) are not generally responsible for the obligations of the LLC.

A Nevada LLC can play an important role in asset protection planning.  There are two types of liability to be concerned about.

Internal Liability – Liability that can arise from within the LLC is called internal, or intrinsic, liability. Nevada statute protects the members of the LLC from this type of liability.

External Liability – External, or extrinsic, liability arises from outside the LLC.  This occurs when a member is sued individually and the judgement creditor is looking for assets to satisfy the judgement.

In the case of external liability, the judgement creditor may attach the member’s ownership interest in the LLC with

a charging order. Under Nevada LLC law (N.R.S. 86.401), the charging order is the judgement creditor’s exclusive remedy.  And the creditor only has the rights of an assignee, not a member.  If no distributions are made from the LLC, the charging order does the creditor little good.

What about Single Member LLCs?

The courts in some states have been more willing to disregard the LLC entity structure when the judgement debtor is the only member of the LLC.  However, a single member LLC in Nevada receives the protection of the charging order, such being the exclusive remedy whether “the limited-liability company has one member or more than one member.”  And no other remedy may be ordered by the court.

Consequently, the Nevada LLC still provides asset protection for a single member LLC and is often used in combination with the Nevada Asset Protection Trust.  In this structure, the underlying investments are held by the LLC and the ownership of the LLC is held by the asset protection trust.

This structure provides 2 layers of protection.  One at the NAPT level.  The other at the LLC level.  And if a judgement is obtained within the 2 year statute of limitations that applies to the NAPT, what does the trust hold?  An LLC membership interest. So the creditor is back to getting a charging order, which doesn’t do them much good.

To discuss whether a Nevada limited liability company makes sense for your situation, call for a consultation.  (702) 894-4110