Charging Order Protection

This post by Drinkwater Law Offices

Posted in Legal, Liability Protection

By: Kerry Kolvet, Esq.

The protection of assets is generally one of the biggest reasons to form a legal entity. Specifically, the protection of business assets from an owner’s personal liabilities is critical to a business’ continuing success. 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, more recently, corporations. 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.

LLCs and Partnerships

Nevada has long recognized charging order protection for limited liability companies and partnerships, but most states have not extended that protection to corporations. As stated above, this protection prevents a creditor from foreclosing on the ownership interest and from the forced sale of assets to satisfy the judgment.

Corporations

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, provided that the corporation meets the following requirements:

(a) Has more than one but fewer than 75 stockholders of record, at any time;

(b) Is not a subsidiary of a publicly traded corporation; and

(c) Is not a professional corporation

These restrictions closely mirror the IRS limitations for s-corporations and include most small businesses.

Conclusion

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.  © 2009 Drinkwater Law Offices

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