LLCs v. Corporations and Limited Partnerships
After deciding to start a new business, one of your first questions will be, “What kind of business entity should I be?”
LLC v. Corporation
A limited liability company (LLC) has natural asset protection features. It can be used to shield investors and active participants of a business in the same way they would be shielded by a corporation. The Washington LLC statute specifically affords LLC owners the same protection as shareholders of a corporation with regard to claims made against the business entity.
An LLC has a definite advantage over a corporation when it comes to creditor’s claims against the owner of the business. If a creditor of an LLC owner obtains a judgment against that owner, the creditor may go to court and ask for a “charging order” against the owner’s interest in the LLC. The creditor will have limited rights to the profits and/or losses of that owner. The creditor will have no right, however, to become an actual voting member of the LLC or to interfere with the management. If an LLC owner is in bankruptcy, a bankruptcy trustee would have more powers than a third party creditor, but the ownership interest in the LLC would likely be purchased by other owners at a substantially reduced value. There are court cases developing which would limit some of these protections where the LLC is owned by a single person or entity.
The creditor of an owner of shares of a corporation can obtain a judgment and execute on the shares and become the new owner of the corporate shares. The new owner of the corporate shares would then be able to vote those corporate shares and otherwise interfere with the management and operation of the corporation like any other shareholder.
LLC v. Limited Partnership.
An LLC has an asset protection advantage over a limited partnership, which requires a general partner who will be fully responsible for all claims against the partnership. A limited partnership will likely have a corporation for a general partner to limit the liability of the general partner. However, that further complicates the business arrangement by requiring a corporate entity within a partnership entity.
The LLC agreement by which the owners govern themselves can have additional asset protection features written into it, depending on the circumstances of the owners. The agreement, and the concerns, will be different depending on whether the owners are family members, strangers, wealthy, cash tight, or a mixture of all and more of these circumstances.
Discuss asset protection with your attorney and include not only the business entity, but also your entire estate plan.
This information is general in nature and should not be relied upon for your specific circumstances. For information, questions, or comments, please contact Douglas J. Engel at 206-340-4850 or firstname.lastname@example.org.