Forming a Corporation – Part Two
July 1st, 2010
Example of how forming a corporation is an Asset Protection strategy
Say you have 15 houses in a limited liability company (LLC) and you are the member manager of the limited liability company (LLC). You have control of your LLC by becoming a member manager of the LLC. If one of the real estate houses burns down and you are sued for $10 million dollars and lose the judgement in court, the plaintiffs generally get only a charging order but they cannot break up your limited liability company (LLC). They also cannot make you sell your assets because your assets don’t belong to you – they belong to your LLC. That means, you can still buy and sell houses and refinance them.
What is a charging order?
A charging order is a court order placing restrictions on the disposal of certain assets, such as real estate property or securities. A charging order is given after judgement and give priority of payment over other creditors.
Example of a charging order
A charging order states something like this: “we have got a $1 million judgement; you own 80% of the stock so if any money is distributed to you, we get part of it.”
If your company does not distribute any money that year, the plaintiffs wont get a cent. And they might have to pay taxes on whatever they do get if your LLC is structured property.
For example, say your LLC made $1 million dollars, you owned 80% and the plaintiffs got a charging order for 80% of whatever your make. That would be $800,000. But you are the managing director of the limited liability company (LLC) so you decide that you are not distributing any income this year. The plaintiffs would have to pay taxes on that $800,000. The IRS doesn’t care whether the plaintiffs actually received any money, the IRS says the plaintiffs has to pay taxes on whatever charging order is for.
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