Is there any kind of "Charging Order" protection for S-Corps?
Can personal creditors issue Charging Orders against your interest in an S-Corp, and are there ways to protect against this?
3 Answers
Reading this Wikipedia article, it looks to my layman's eye like yes, a charging order against you personally might get to your ownership interest in an S Corp in California, and certainly could cause a lot of headaches.
As far as what you can do to protect against that, you should talk to a competent attorney in your jurisdiction.
Personal creditors are able to go after your property. There is some limitation in bankruptcy law regarding the creditors tryingt to liquidate a homestead property but there is nothing that stops them from equity in either an S corp or an LLC. The liability limitations that those entities offer come from creditors of the corporation not the other way around.
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In this book, http://www.amazon.com/Corporation-Choose-Right-Form-Business/dp/1413300898 the author says that if you form a multimember LLC, you can arrange for it to have charging order protection in some states which prevents creditors from taking your equity in an LLC. Are you saying that that has changed? I was asking if similar protections somehow existed for an S-Corp as well – Noli 14 years ago
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I'm not an attorney but the LLC limitation of liability is from the business actions not the individuals actions. The operating agreement can have clauses about how the sale of the interests can occur in a multiparty LLC so there might be something to protect it but that seems like a means to upserb bankruptcy law and ownership interest in a company is generally not exempt. So I'd contact an attorney and have him show you that there is in deed case law to protect you on the personal liability side. – John Bogrand 14 years ago
The way you protect this is by having multiple llc's under an S corp. Your umbrella S corp (parent company) owns everything. Each llc manages one segment of your business. So LLC1 handles the lease with your landlord. LLC2 charges income from your customers. LLC3 hold your IP property.
The above scenarios will differ greatly for your business. I personally have 1 llc that collects income from all my business, and then each business is its own LLC and holds all liablities. All the income passes up to an S corp, which myself and partners own shares of.
Since your income gathering llc doesnt do any other business, there is limits to what it can be sued for. And since your liablility holding LLC's dont gain profit, it deters any attorney from suing you on a contingent basis. It gives you a small level of protection. For big suits, you could get cross complaints against all your companies, but this is usually enough to prevent a landlord or vendor suing you.
