Asset protection is big business in the private sector. But did you know that the business of asset protection extends in some cases into the state level as well?
When it comes to attracting and retaining businesses, there’s a lot of money at stake. Nevada, Delaware and Wyoming are fiercely competitive in this area, offering up great asset protection laws, low business filing fees and good privacy laws. This year, Nevada’s lawmakers upped the ante, by introducing legislation that extends charging order protection to S Corporation shares.
A charging order is a creditor remedy that is found in most states. What it means is that if you have one or more LLCs (limited liability companies) or LPs (limited partnerships), you can protect your ownership interests in those business structures, and the underlying assets within those structures from seizure by a creditor if you are sued personally. A creditor who receives a judgment against you can attach a claim to your interests, meaning that any money distributed by the LLC or LP will be rerouted to the creditor until your debt has been repaid. However, a creditor with a charging order is also responsible for paying any taxes on distributions made by that LLC or LP – including taxes that occur when phantom income is generated (i.e., the business shows a profit on paper, but doesn’t distribute any money to the owners). Some states allow creditors to go back to court for a special order to foreclose on the charging order and take over, but other states do not.
This charging order protection has made LLCs the fastest-growing business structure in the United States, and one of my favorite business structures to operate just about any kind of business through (remember, an LLC can also select how it wants to be taxed).
Now Nevada legislators have voted to apply that same charging order protection to the owners of S Corporations. Unlike LLCs, the owners of S and C Corporation shares have had no such protection over their shares. Those shares become a regular asset in the eyes of the courts, meaning that if you are sued and cannot pay a judgment against you, a creditor can apply to seize your shares. If you own all or a controlling interest in a business operating through an S or C Corporation, this means that the creditor now has enough control to sell off some or all of the assets and liquidate the business.
The new charging order protection came into effect on July 1, 2007, and applies to all companies incorporated in Nevada, as long as the legal action being taken was made after July 1st.
So should you run out and form S Corporations in Nevada? That depends. To my knowledge no other state in the U.S. has this type of legislation, which means that it may not be respected outside of Nevada. Until we see a few court cases testing the strength of this law I’m not sure it will hold up. But for the time being, Nevada has a unique place in the country when it comes to progressive asset protection.