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ASSET PROTECTION SINGLE ENTITY LLC _____________________________________________________________ One of the major concerns people have is how to protect their home in the event of a lawsuit. Many states have limited homeowner protection for personal residences and other states, such as Texas and Florida, basically have unlimited protection. Many times the fear of losing one’s home, is enough to get a defendant to settle even if the defendant does not feel that the lawsuit has merit or is legitimate. The lawyers know this and many lawsuits are filed in this country just because the lawyers know that they can get a settlement. They know that the fear of losing one’s home or other assets will bring the defendant to the settlement table. For years limited partnerships have been used by the astute to protect their homes as well as other assets in the e vent of a lawsuit. Attorney’s and promoters have been selling them nationwide for the past 10 to 15 years. The primary reason for this is that limited partnerships have something called “charging off protection”. Most states have adopted similar charging order language for the limited liability company statutes. Under the Uniform Limited Partnership Act and the Revised Uniform Limited Partnership Act, a creditor cannot reach the assets of the partnership. The creditor must obtain a “charging order” from the court. Such charging order restricts the creditor to distributions if and when they are made. The creditor is not entitled to any voting rights, and thus cannot force a distribution. The debtor controls the voting rights and therefore has the sole power to decide if and when a distribution will be made. Another feature of a partnership or an LLC that is classified as a partnership is the ability to give phantom income to the creditors. Under Revenue Ruling 77-137, the IRS held that an assignee of a limited partnership interest was the beneficial owner of such interest and as such “may report the distributive share of partnership items of income, gain or loss, deduction, and credit attributable to the assigned interest… in the same manner and the same amounts that would be required if [the assignee] was a substitute limited partner”. So, even if the limited partnership or LLC does not make distributions to the partners, according to the IRS ruling the creditor may be liable to pay taxes on undistributed profits. This fact has kept many creditors from asking for charging orders. NEXT
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