Friday, September 7, 2007

Nevada Extends Charging Order Protection To S-Corps

This one was brought to my attention by Diane Kennedy's tax Loopholes Updates newsletter. LLCs and Limited Partnerships have enjoyed protection from charging orders in many states for some time. A charging order is a legal instrument that says if a creditor obtains a judgment against you personally, the creditor can attach a claim to your interest in an LLC or LP that you are part of. The protection comes from that fact that the creditor does not get any money until you make distributions from the LLC or LP - which you never have to do. However, they are responsible for any taxes on profits the LLC or LP makes, even if those profits are only on paper and never distributed to shareholders. Thus, if a creditor gets a charging order against your LLC, he is liable to pay the taxes, but may never get any income from it.

Nevada is one of the few states, along with Delaware and Wyoming, that is aggressively trying to attract business interests by passing laws that are very business-friendly. In continuing that trend, Nevada has no extended the same charging order protection enjoyed by LLCs and LPs to S corporations. As Diane points out in her newsletter, this is a new law and we should wait until there are several court decisions supporting it to get all excited, but it is worth keeping an eye on. And, of course, you shouldn't be holding your investment real estate in an S-corp anyway, but one could be the manager of your LLC...

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