Paul and Karen own a business and have hired a day laborer to trim trees for a client. The day laborer injured his arm and sued Paul and Karen. Luckily they previously had sought the help of asset protection professionals who recommended that they establish a limited liability company in Luxembourg. The professionals also advised Paul and Karen to establish a bank account in that country. The plaintiff therefore found few assets. They settled the dispute out of court and paid a small amount for minor medical costs.
Specially designed companies offer maximum asset protection from internal and external liabilities. If the liability is internal, creditors can be awarded assets of the company but not the assets of the members (shareholders). The limited liability veil protects the interest of the members. If the liability is external, arising from a lawsuit against any of the members for malpractice or negligence, the creditors may be awarded assets of the company. The creditors will however need to comply with a charging order or a court– ordered interest in the assets; this is essentially a lien, which limits creditor’s rights to the distributions made by the company to the member.
To maximize asset protection offered by a company against external liabilities ensure that it has more than one member and that all members are not liable to the same creditor. Design the company carefully. For example, file the company in a jurisdiction that places rigorous limits on the charging order. In English law (the basis of U.S. law), a charging order is a court order in favor of the creditor for which the debtor must pay with interest and court costs. Some states in the U.S. allow the creditor to collect distributions from the company and to obtain a court order for all accounts, orders, and directions.
Another strategy is to include special provisions in the company’s operating agreement, including a provision to not assign ownership interests to others (including creditors) without the consent of the members and an agreement that provides that the company need not disclose any information to non-members. The operating agreement can be created to divide voting and control so that the members will be well protected from their creditors.