• LLC statutory charging order provisions offer unique asset protections to family businesses.
• Statutory conversions of corporations to LLCs can prevent the loss of family businesses to creditors or divorcing spouses of family members.

There are instances where the single-member LLC is appropriate, and these instances may include the following:

1. The Business Owner, such as a Contractor or the Owner of any Business. When a person wants to protect assets owned outside the LLC from lawsuits occurring inside the LLC.

2. The Landlord. When a person who owns rental property wants to protect his or her individually owned investments outside the rental property from lawsuits resulting from an accident on the rental property, which can be owned by an LLC.

3. The Owner of S-Corp Shares. When the client owns S-Corp stock and wants the stock owned by an LLC (for asset protection not provided by the corporation) the LLC must be a single-member LLC deemed to be a disregarded entity. If the S-Corp stock is transferred into a multi-member LLC, the S-Corp will lose its S Election.

4. The Lonely Client. When the client has no other person or entity to name as the second member of the LLC.

Individuals who want to ensure the availability of a key set of LLC statutory business asset protections called “charging order protections” should think about who holds the LLC membership rights and have a clear Operating Agreement. To explain:

1.     Most U.S. LLC acts contain provisions that provide, in effect, that if a member of a multi-member LLC (a “member-debtor-in-default”) incurs an unsatisfied judgment arising outside the LLC’s business, the judgment creditor may obtain a “charging order” against the LLC.  A charging order requires, to the extent of the judgment, that the LLC must distribute to the creditor any LLC profits it would otherwise distribute to the member-debtor-in-default.

2.     Furthermore, many state LLC acts expressly provide that these charging order provisions are the exclusive remedy for the above judgment creditors; and even as to LLC acts that are not express, extensive case law and important policy considerations support this exclusivity.  Because of charging order exclusivity, creditors cannot levy on the membership rights of member-debtors-in-default and thus become substituted LLC members.  And because they cannot become substituted members, they cannot force the sale of LLC assets in satisfaction of their judgments.  Although general and limited partnership statutes also provide charging order provisions, corporations do not.  For many individuals, charging order protections are a major reason for holding assets and conducting their businesses in LLCs rather than in corporations.

The policies underlying charging order provisions are twofold.  First, charging order provisions support the critical principle (often referred to as the “pick your partner” principle) that LLC members should not have to accept potentially disruptive creditors as co-members.  Second, these provisions thereby prevent creditors from forcing sales of LLC assets and thus depriving innocent non-debtor members of the going concern value of their LLCs.

Wisconsin defines member to be a person. WI STATS 183.0102(15) Member” means a person who has been admitted to membership in a limited liability company as provided in s. 183.0801 and who has not dissociated from the limited liability company.

Person is defined WI STATS 183.0102 (18). “Person” includes an individual, a partnership, a domestic or foreign limited liability company, a trust, an estate, an association, a corporation or any other legal or commercial entity.