Many solo-preneurs or spouse-owned businesses (“Single Member” Limited Liability Companies or business entities) think that simply registering their business as a Limited Liability Company (LLC) protects them and their families from lawsuits. You may be surprised, however, to learn that you might not be as safe as you think unless you take some additional steps.
First, let us make one thing clear: we live in Washington State, which is a community property state. Therefore, a spouse-owned LLC is considered the same as a single member LLC. There might be ways to register your business as a multi-member LLC but we recommend consulting an attorney to help you set that up.
We wrote previously about inside and outside liabilities. You and your personal assets (for instance, your home) should be relatively well-protected against liabilities from inside of the business. But how can debts, lawsuits, and creditors from you (or your spouse’s) personal life affect your business?
These are known as outside liabilities and that is what this blog post is about – outside liabilities. Outside liability emerges from events that are unrelated to the running of your business. An example is if you are deemed at fault in a car accident (it happens). The victim of the accident then has a claim against you and your assets. If the victim receives a judgment against you for the accident, then in order to receive payment for the judgment (debt), they can go after your interest in your LLC.
LLCs are often protected from outside debt by what is called a “charging order.” A charging order is a remedy that basically orders an LLC to pay future distributions to a creditor, instead of the LLC member. The charging order is often the exclusive remedy for outside creditors seeking payment from an owner’s interest in a multiple member LLC. The outside creditor does not step into the shoes of the member, so they will not have the same ownership rights as the member. This prevents the creditor from liquidating LLC assets or selling and dissolving the business. The idea here is to prevent the debts of one member from affecting the other members of the business.
In single owner/member LLCs, or LLCs owned by spouses, the charging order is not necessarily the exclusive remedy for outside creditors. Meaning that, while seeking payment of the debt, someone else could take over your business. Only certain states provide this “charging-order-only” protection to single owner LLCs. Most states allow creditors to step into the business, where they can then reach and liquidate LLC assets in order to satisfy payment of the owner’s debt.
Business owners like us read that and get anxiety because we work so hard to build our businesses. Luckily, though, there are ways to minimize the risk. If you’d like to learn whether your LLC is safe from outside creditors, give us a call and we can discuss.
Colin Ley is a Seattle asset protection attorney. He is also the co-founder of LayRoots along with his wife, Shreya.