by Alan Russell

Created on: February 26, 2010

An LLC is a Limited Liability Company. It is a business entity like a corporation or a limited partnership. It may hold assets in its own name, enter into contracts, sue and be sued and do all activities permitted a business entity in this country. Although it has been utilized in Europe for many years, it is considered the “new kid on the block” in the United States. It was first developed in Wyoming around 1975. It was not until the mid 1990s that the LLC was recognized as a separate distinct business in all 50 states of the country.

The LLC has two distinct participants. The owners of the LLC are called “members.” The LLC was be run by a “manager.” It may be formed as a “member-managed” LLC. Or it may be formed as a “manager-managed” LLC. If it is formed as a “member-managed” LLC, all the members [owners] of the LLC have managerial responsibilities and duties.

 On the other hand, if it is formed as a “manager-managed” LLC, the LLC is run by one or more persons or entities that have been designated to act as the manager of the LLC. In this case the members of the LLC have no managerial responsibilities or duties. The remaining members merely act as “passive investors” and will have no say in the running of the LLC.  However, a member of a “manager-managed” LLC may also act as the manager. In that case the member will also be the manager, but the other members will remain as “passive investors.”

The LLC may be formed and taxed in different ways, unlike partnerships or corporations. An LLC may be formed and taxed as a C corporation, an S corporation, a limited partnership, a sole proprietorship or a disregarded entity. The method of formation and taxation which is utilized will depend upon how the LLC will be used.

The LLC is an excellent asset protection entity. A judgment obtained against the LLC may be enforced only against the LLC. Neither the members nor the manager are liable for the debts and obligations of the LLC. The members may lose their investment in the LLC, but the judgment creditor cannot attempt to collect that judgment from the member directly. He or she is not liable for that judgment. Neither is the manager.

In the event a judgment creditor obtains a judgment against one of the members of the LLC, the LLC is not liable for that judgment. The creditor cannot take any of the assets of the LLC in order to satisfy the judgment for those assets are owned by the LLC and not the individual member. The only avenue open to the judgment creditor to collect his/her judgment is through the issuance of a “charging order.” A charging order requires the manager to pay any profits designated to the debtor member to the judgment creditor instead. However, while the judgment creditor is waiting to receive the profit checks, he/she has no other rights regarding the LLC. The creditor may not go to member meetings, examine the books and records of the LLC nor become privy to any of the inner workings of the LLC. Once the judgment creditor has received satisfaction of his/her judgment, he is out of the picture and the debtor member of the LLC retains all his ownership interests in the LLC.

Learn more about this author, Alan Russell.
Click here to send this author comments or questions.