Asset Protection is generally one of the main reasons to form a legal entity. Specifically, the protection of business assets from an owner’s personal liabilities is critical to a business. In many states, a personal creditor may charge a stockholder’s stock with payment of a judgment. Such a remedy could result in the forced liquidation of a viable business to satisfy an owner’s personal debt to the detriment of other owners.
In Nevada, charging order protection is extended to partnerships, limited liability companies and as on July 2011 corporations have been added to this protection (with 100 shareholder limitations). What this means is that a personal creditor’s only remedy against an owner’s stock is a charging order and, as a result, that creditor must wait for distributions from that entity to satisfy any judgment. The creditor cannot force distributions from the entity, nor can the creditor exercise any control over the entity, thereby allowing the business to continue operations despite the creditor’s claim.
LLC's and Partnerships
Nevada & Wyoming have long recognized charging order protection for limited liability companies and partnerships, few states have extended that protection to corporations. This protection prevents a creditor from foreclosing on the ownership interest and from the forced sale of assets to satisfy the judgment.
Nevada was the first state to provide charging order protection to certain corporations under NRS 78.746. This provision provides the exclusive remedy available to a judgment creditor related to a stockholder’s stock. The judgment creditor is only provided the rights of an assignee of the stock and has no rights to management or control of the corporation, When a corporation:
(1) Has more than 1 but fewer than 100 stockholders of record at any time.
(2) Is not a subsidiary of a publicly traded corporation, either in whole or in part.
These restrictions closely mirror the IRS limitations for s-corporations and include most small businesses.
The expansion of these rights to certain corporations helps further Nevada’s business friendly reputation. However, it is unclear when and if other states will follow suit with similar legislation which leaves the answer unclear as to whether this law will be respected outside of Nevada.