Why do shareholders of a corporation have less protection than members of an LLC?
When choosing to form either a corporation or a Limited Liability Company (“LLC”), there is an often overlooked but very important difference between being a shareholder of a corporation and a member of a LLC. A judgment creditor of a shareholder of a corporation can take possession of the shareholder’s shares and sell them. In many small businesses, this weakness could also allow the creditor to actually control the corporation by seizing the stock of a controlling shareholder.
The membership interests of an LLC are more protected. A creditor of a member of an LLC is entitled only to a “charging order,” which is a court order against an owner of an LLC interest that gives a creditor the right to receive any distributions that the owner of the interest would have received until the judgment is paid. The charging order may not seem like much protection, but the creditor is only allowed to receive distributions. Unlike the creditor of a shareholder of a corporation, the creditor of a member of an LLC does not get the management and voting rights that may go along with the LLC membership interest.
Importantly, the LLC’s managers are left to determine if and when distributions are made. Distributions may not be made or may be delayed. Compared to the remedies afforded to a creditor of a shareholder of a corporation, the charging order is not as attractive a remedy to most creditors. As a result, the prospect of a charging order may convince a creditor to settle on more favorable terms than might otherwise be possible. Shareholders of a corporation have little such leverage. Thus, in addition to being a very useful business tool, the LLC can be a valuable personal asset protection tool.
For more information or to schedule a consultation, please contact the attorneys at Skufca Law at 704-376-3030.
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