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An Overlooked Aspect of a Limited Liability Company

On Behalf of | Dec 19, 2016 | Business Litigation |

Limited liability companies appear to be the flavor of the day for entrepreneurs setting up their own businesses. The establishment of a business enterprise is often thought to shield the owner from personal liability to creditors. It is true that owners of an enterprise do not have personal liability for the acts or transactions of their business unless the owner’s conduct is tortious; i.e., unless the owner was personally negligent and harmed a third party or engaged in fraudulent conduct.

A limited liability company provides protection to owners in that the sole remedy available to a judgment creditor is a charging order that constitutes a lien on the interest of the owner in distributions from the company. However, that protection applies in the case of multi-owner limited liability companies. In the case of a single owner limited liability company, if the judgment creditor demonstrates that distributions will not satisfy the judgment within a reasonable time, the court may order foreclosure of the owner’s interest. In that instance, the owner’s interest is offered for public sale and the high bidder will obtain the owner’s entire interest in the company.

To protect against such a result, it is often wise to create a multi-member limited liability company, even if there is only one other member and that other member holds merely one percent of the membership interests in the company.