South Dakota Charging Order: How Do They Rate?

When we started this set of articles, I thought it good if we looked at the charging order, what it does and, because LLC laws are set at the state level, look at how charging orders change between states. We are looking at it from how it helps with domestic asset protection issues within the various states.

As an asset protection focused attorney, I am often asked which state is better for providing a client asset protection. My typical answer is the lawyer’s classic, “It depends.” States are ranked in a number of articles and lists as to which is better and why. A famous attorney in the field, Steve Oshins, has his list here. Typically, in almost any list, Delaware and South Dakota are talked about in the top ten of states. Some of the lists have them even higher.

So here’s our South Dakota discussion:

The General Rule of No Liability

Just as we discussed last week, the general rule in all states, including South Dakota, is that the money or property of an LLC cannot be taken by creditors to pay off the personal debts or liabilities of the LLC’s owners. So if three people form a South Dakota LLC to operate their new business and one member owes money on his personal credit cards. a collection agency can attempt to collect on the debt from her personal assets but it cannot take money or property owned by the LLC.

South Dakota LLCs and Charging Orders – Exclusive Remedy

Like Delaware, a charging order is the only legal procedure that personal creditors of a South Dakota LLC member can use to get at a member/debtor’s LLC ownership interest. A charging order directs the LLC to pay to the creditor any distributions of income or profit that would otherwise be distributed to the LLC member/debtor. Like most states, creditors with a charging order in South Dakota only obtain the owner-debtor’s financial rights and cannot participate in the LLC’s management.

Like Delaware, a creditor has to get a judgment against the LLC member personally, then apply for a charging order. That creditor can’t participate in LLC management, so it cannot order a distribution or sell the company to pay off debt. But if the creditor obtains a charging order ordering the company to pay to it any distributions the Company would ordinarily make to the member until the judgment is paid. However, if there are no distributions, there will be no payments.

As we discussed with Delaware, the charging order makes it difficult or impossible for any of the owners to take money out of an LLC without having to pay the judgment creditor first.  However, to the positive, South Dakota does not permit creditors to foreclose on the owner’s interest.

Single Member LLCs

A big area of discussion in the asset protection world is the treatment of single member LLCs. With a single member LLC, there are no other members to protect so the rationale for limiting creditors to a charging order disappears. The treatment of single member LLCs is what really creates a major difference between the states. To date, South Dakota has not made a distinction in how it handles cases involving single and multi-member LLCs. This makes South Dakota a particularly friendly state for people who want to form LLCs to protect assets from personal creditors.

Next time we will check out Maryland. They aren’t listed in the top ten and will show some of the big differences that may occur. Until then, good luck and good hunting.

Randy

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Related articles

The Fisher Law Office is known for its experience in asset protection, business counselling and development, business succession planning, estate planning and probate administration. Annapolis attorney Randall D. Fisher has practiced for over 20 years, is licensed in Maryland, Texas, Wyoming and the District of Columbia, and has clients all over the country. He maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.

If you need legal help, or just want to find out how he is doing at eliminate his slice, find out how to reach Randy via TheFisherLawOffice.com or find him at Facebook.com/FisherLawOffice, on Twitter @thefisherlawoffice, or at LinkedIn.com/in/FisherLawOffice.

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Delaware Charging Orders: How Do They Rate?

We started looking at various states for asset protection, specifically looking at what is called a “Charging Order.” Creditor’s rights laws against companies vary by state. Some are more friendly, others are not. How does Delaware stack up?

No Liability for Members’ Personal Debts

So you owe money and you own all or part of a company. It is well understood in corporations that you can’t take a company’s money or property to pay a shareholder’s debt. The general rule in all states for LLCs is the same. In addition to protecting LLC members from the business debts, the LLC also protects the business and its owners from the LLC member’s debts or personal liability  unrelated to the LLC’s business.

The Only Legal Procedure

In Delaware, charging order are the only legal way you can get at a member’s LLC ownership interest. This order directs the LLC to pay you any distributions that would otherwise be distributed to the member. Like most states, creditors only obtain the debtor’s financial rights and cannot participate in management.

So how do you get a charging order? First you win a judgment against the LLC member personally. After winning the judgment, you apply to the court for a charging order. Even with a charging order, you cannot participate in company management. You cannot order the LLC to make a distribution or be sold to pay off debt. Frequently, creditors who obtain charging orders against LLCs end up with nothing because they can’t order any distributions and the LLC can choose not to make any.

A charging order may be weak but it is not necessarily toothless. A charging order can make it difficult or impossible for the member or the other owners to take money out of the LLC without having to pay you first.

Foreclosure and Dissolution Not Allowed

Delaware’s LLC law says that the charging order is the exclusive legal procedure that personal creditors of members can use to get at their LLC ownership interest. Thus, unlike some other states, Delaware does not permit you to foreclose on the owner’s LLC ownership interest or get a court to order the LLC dissolved and its assets sold. This makes Delaware a particularly friendly state for people who want to form LLCs to protect assets from personal creditors.

Is One a Lonely Number?

With a single-member company, there is no one else to protect so the rationale for limiting creditors to a charging order disappears. Recognizing this, some states have adopted special rules for these companies, allowing you to take over the member’s entire company interest, not just the right to receive distributions. Other states have adopted laws specifically recognizing the company’s right to the same charging order protection afforded to multi-member companies.

Delaware changed its law in 2013 to clarify the protection applies to both types. This makes Delaware one of the most friendly states for those who want to protect their assets by forming any kind of LLC. The law is evolving, however, and different rules regarding single member LLC protection are evolving in bankruptcy.

The best protection, however, is to add another member. This gives more protection in bankruptcy, or if the company becomes subject to state laws that provide less protection. There are rules, though. The second member must be treated as a legitimate co-owner of the company. If the second owner is added merely on paper as a sham, the courts will treat the company as a single-member entity. A new co-owner must pay fair market value for the interest acquired and otherwise be treated as a “real” LLC member–that is, receive financial statements, participate in decision making, and receive a share of the LLC profits equal to the membership percentage owned.

Next time we will check out South Dakota. Until then, good luck and good hunting.

Randy

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Related articles

The Fisher Law Office is known for its experience in asset protection, business counselling and development, business succession planning, estate planning and probate administration. Annapolis attorney Randall D. Fisher has practiced for over 20 years, is licensed in Maryland, Texas, Wyoming and the District of Columbia, and has clients all over the country. He maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.

If you need legal help, or just want to find out how he is doing at eliminate his slice, find out how to reach Randy via TheFisherLawOffice.com or find him at Facebook.com/FisherLawOffice, on Twitter @thefisherlawoffice, or at LinkedIn.com/in/FisherLawOffice.

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Chicago Cubs, the World Series and Annoying Bosses: Making Sense of It All

Have you ever had a boss that you could never make happy? So now you are the boss and have employees that annoy you. They came with qualifications, but they just don’t seem to be working out. I know you would never be the annoying one. But in this age of millenial trophies for just showing up, we should probably talk about it.

Years ago I had a boss like that. I was working as a reporter for a small town in Central Texas. In that scenario you cover both regular news and sports. I worked for two bosses — the managing editor for hard news and the sports editor for sports news. I regularly wrote hard news for the managing editor and never had a bit of trouble or criticism. It wasn’t that way with the sports editor.

The town was a hot bed of high school sports. First round draft picks in both football and baseball regularly came out of this town of 10,000 people. The players who “only” made All-America teams would look like a who’s who from the College Football Hall of Fame. But my problem satisfying him wasn’t football.

I never played it at any level other than sandlot pickup and have knee surgery to show for that. So in covering it, I always made sure I double checked facts, wrote about players’ emotions in the moment and had coaches school me on background about how plays were designed and why they were called.  My problem was baseball.

What’s hard about baseball? You throw the ball, you hit the ball, you run the bases, you tag the runner. Right? Wrong!

My boss was a wisp of a fellow; he looked like he couldn’t throw a baseball through a paper bag or hit one through it, either. But he knew pitching (“if you have top stuff, you have to show them your second and third pitch; if you have garbage, you have to show them all the garbage so they can’t tee off on any of it.”) He knew hitting (“Bad hitters hit change-ups and hate heat; good hitters hit fastballs and hate junk.”) And he knew strategy (“Everyone leaks oil under pressure; the great ones accept it, deal with it and overcome it”).

Professionalism Under Pressure

When I wrote for him, if I didn’t have all the angles covered, it was a personal insult. He sent me back and back and back to get it right, regardless of the deadline. And if I missed the deadline, I caught it from the publisher.

What I came to realize over time was his level of required professionalism drug me forward as a writer. He wasn’t going to accept anything but the best in his section. He also taught me that perfection was a virtue and perfection under fire was true talent.

I am not sitting here trying to tell you I had true talent. In reality, the closest I ever got to a compliment was when I wrote a piece during a state championship game. After I turned it in, he edited it without a comment. Others in the office came marching through telling him what a great job I had done. His only remark once was to look at me, grin and say, “Well, it wasn’t bad once I fixed it.” I could not take the success. I took the rest of the day off.

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Charging orders: What are they and whose is better

At a recent lunch, a colleague posed the question, “Which state do you think has the better charging order?” That posed an interesting question that takes more time than gobbling down a crab cake sandwich allows.

So I started researching the experts. And they were all over the map.

Three lawyers writing for the American Bar Association’s Business Law Today, gave an excellent description of sorting out the issues here.

With apologies to authors Jay D. Adkisson, Carter G. Bishop and Thomas E. Rutledge, they described a charging order as a remedy provided to a judgment-creditor of an LLC member where that creditor may legally attach distributions to that member, thereby diverting that income stream to satisfy the judgment. They went on to say that under most state formulas, the charging order is subject to redemption, and a lien on the LLC interest created by the charging order is subject to foreclosure.

In simpler English, the objective then is to get the judgment-creditor paid while precluding that judgment-creditor from interfering with the business.

(Okay, now does that have you lost? Think about me trying to think about this while eating the crab cake.)

So my colleague, who hadn’t seen the description “under most state formulas”, knew that some were different than others so that meant that some were better than others. So then, whose is best? So I started trying to find an expert to tell me that. What I often found was the typical “my state’s better than yours.”

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Spooked about politics? How worried should you be?

I had the opportunity recently to hear Dr. JoAnne Feeney, Portfolio Manager of Adviors Capital Management, speak about the state of the economy.

She started with a discussion of spending patterns that her firm was seeing in the immediate future. She worked the discussion through the different economic outlooks of Millenials, Gen-Xers, middle agers and old people. (Unfortunately, I knew where I fell in the grouping. There was no volunteering for another category.) The true positive from the talk was a discussion of the signs that money was moving.

She then took her thoughts on the state of investments in automobiles, computers, new homes and furniture. What made the discussion fascinating were the keys that the advisors like her consider when analyzing companies for potential investments.

Then, without really tipping her hand as to personal preferences, she walked through the impact of either political party winning the upcoming November election and the likelihood of the impact on the economy.

She published similar thoughts from her talk this morning and I pass them along through the link here for your benefit.

http://www.advisorscenter.com/pages/commentariesDetails.php?Spooked-About-Politics-How-Worried-Should-You-Be-297

Let me know if you think she is right.

Until then, good luck and good hunting.

Randy

__________________________________________

Related articles

The Fisher Law Office is known for its experience in asset protection, business counselling and development, business succession planning, estate planning and probate administration. Annapolis attorney Randall D. Fisher has practiced for over 20 years, is licensed in Maryland, Texas, Wyoming and the District of Columbia, and has clients all over the country. He maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.

If you need legal help, or just want to find out how he is doing at eliminate his slice, find out how to reach Randy via TheFisherLawOffice.com or find him at Facebook.com/FisherLawOffice, on Twitter @thefisherlawoffice, or at LinkedIn.com/in/FisherLawOffice.

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