Delaware LLC for asset protection
One of the things that basically all LLCs provide is personal asset protection from what the LLC does during business. The biggest misunderstanding of asset protection in an LLC is that a very high percentage of LLCs formed do not provide any asset protection for the LLC from the member.
Think about it. The LLC is usually making money and has money, but the members are the ones out there personally guaranteeing their mortgage, their car loans, out there in the public possibly getting in trouble with the law or civily. Most LLCs formed have bad protection covering the LLC from the members that own it.
People with a normal LLC that get a default judgment on them personally, will get their membership interests in the LLC assigned to their creditor, and then most states have the power to issue a court order allowing the new assignee of the membership interests to be able to become a member, and request dissolution of the LLC to force the distribution of assets held in the LLCs name.
For the last 10 years or so, Florida has been known as one of the premium places to form an LLC to stop this from happening. In June of 2010, the court issued a ruling against Olmstead basically giving his creditors the complete ability to force the Florida LLC to distribute its assets.
The biggest point of forming a Delaware asset protection LLC is covered under Title 6, Subtitle II, Chapter 18-702 to 18-703 (Assignment of Limited Liability Company Interest of the DE LLC Act).
It specifically states:
“The assignee of a member’s limited liability company interest shall have no right to participate in the management of the business and affairs of a limited liability company except as provided in a limited liability company agreement or, unless otherwise provided in the limited liability company agreement, upon the affirmative vote or written consent of all of the members of the limited liability company.”
This means that the creditor that won an assignment of a member of a LLCs interest does not get the right to participate in the management of the Delaware asset protection LLC.
“Unless otherwise provided in a limited liability company agreement, the pledge of, or granting of a security interest, lien or other encumbrance in or against, any or all of the limited liability company interest of a member shall not cause the member to cease to be a member or to have the power to exercise any rights or powers of a member.”
This means that if a member gets its membership interest seized or taken that they do not lose their rights as a member.
“On application by a judgment creditor of a member or of a member’s assignee, a court having jurisdiction may charge the limited liability company interest of the judgment debtor to satisfy the judgment. To the extent so charged, the judgment creditor has only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled in respect of such limited liability company interest.”
This means that a creditor ONLY has the right to receive a distribution. This is very important, because if a creditor does not have the ability to become a member, the member can decide to not distribute the assets of the asset protection LLC in Delaware.
“This chapter does not deprive a member or member’s assignee of a right under exemption laws with respect to the judgment debtor’s limited liability company interest. The entry of a charging order is the exclusive remedy by which a judgment creditor of a member or of a member’s assignee may satisfy a judgment out of the judgment debtor’s limited liability company interest. No creditor of a member or of a member’s assignee shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company. The Court of Chancery shall have jurisdiction to hear and determine any matter relating to any such charging order.”
This basically sums it up and there’s a very important word that almost every other state does not have for this statute: “EXCLUSIVE”. That means that the charging order is the exclusive remedy. The Florida Law was thought to protect the LLC from the members and had language similar to this, but did not really completely specify that the charging order was the exclusive remedy. Exclusive is exclusive and hard to turn into a grey area, thus giving the Delaware LLC one of the best forms of asset protection in America, protecting the LLC assets from the members that run it.
For serious asset protection strategies, you should consult with an attorney that specializes in this. We just act as the registered agent for Delaware LLCs, and can form and create the Delaware asset protection LLC for you. If you follow the links and read through the state code a little more, you’ll notice that the default is always unless the operating agreement specifies different. Having a proper Delaware asset protection LLC operating agreement is crucial to your success, although the state provides most of the things you would address in an operating agreement under its standard laws. One of the biggest areas not addressed by default Delaware code is the fact that an assignee CAN become a member unless it is not allowed in the operating agreement.
If you’d like help setting up a Delaware asset protection LLC, you can sign up for immediate service below.