Most individuals who start their own business--and the attorneys who represent them--understand that there are certain legal benefits to incorporating their business. By setting up the business into a corporation or limited liability company (LLC), if followed properly, the owner's personal assets are safe from potential lawsuits against the business.
For example, if Jim owns a painting service, called "Jim's Painting," he might have four employees, each driving a "Jim's Painting" truck. If one of the employees injures a person in the worktruck, Jim will be sued for his employee's acts. If a jury finds Jim's employee at fault, it will also likely rule against Jim, subjecting both his business assets and his personal assets to levy and seizure. Suddenly, Jim could potentially lose everything to a judgment!
By correctly incorporating, Jim's personal assets would be safe. In the above scenario, if an employee of "Jim's Painting, Inc." injured someone, Jim's Painting, Inc. could be sued--but if a jury returned a verdict of liability, Jim's personal home and assets would be safe.
All of this, of course, is fairly common knowledge. But what many business owners and entrepeneurs don't know is that there are ways to incorporate so that you can protect some of your assets from personal liability judgments--and it's perfectly safe and legal! It's the Limited Liability Company.
In North Carolina, the two common liability protections are corporations and limited liability companies. Though they operate a bit differently (a corporation has a bit more formality attached to it, while an LLC is a bit less formal and operated more like a partnership), they both have the goal of protecting personal assets from liabilities attaching to "company" activities.
What many people don't know is that the LLC offers one more layer of liability! Let's go back to the example above of Jim. Let's assume he correctly incorporated, his business has grown, and now Jim's Painting, Inc., is a successful business with 20 trucks, a large cashflow, and more than 100 employees. What if Jim got sued for something unrelated to his business--say, an auto accident in his own car? In that case, he could be sued individually. If the jury returned a large verdict (larger than his insurance would cover), the plaintiff would be entitled to satisfy the judgment against Jim by levying own and selling almost anything Jim owned in his own name: his cars, his bank account--and even Jim's shares of stock of Jim's Painting, Inc. Suddenly, Jim could face the real threat of losing his company to a judgment that had nothing to do with the lawsuit or judgment!
This is where the LLC offers one more layer of protection! Unlike a corporation, an individual's ownership in an LLC is not subject to a judgment levy. See Herring v. Kessler, 563 S.E.2d 614 (2002). The blurb for that case reads as follows:
"Judgment creditor filed motion seeking an order directing judgment debtor's membership interests in certain limited liability companies (LLC) be sold and the proceeds applied towards the judgment, and requested a charging order that pending the sale of debtor's membership interests in the LLCs, any distributions and allocations of those interests be applied towards the satisfaction of the judgment. The Superior Court, Wake County, Jack W. Jenkins, J., entered judgment, enjoining creditor from seeking the seizure or sale of debtor's membership interests in the LLCs, denying creditor's motion, insofar as he sought to have debtor's membership interests in the LLCs sold or transferred, and granting creditor's motion for a charging order. Creditor appealed. The Court of Appeals, Greene, J., held that creditor's remedy in having the judgment satisfied did not include seizure and forced sale of debtor's interests in the LLCs.Affirmed."
Therefore, whereas if your business is in the form of a corporation in North Carolina, your stock could be subject to seizure for personal judgments--your limited liability shares will not!
There are two limitatiosn, however, of which you need to be aware.
First, you cannot place property into an LLC to escape liability or a judgment that is already looming against you. If you are sued, and convey your property to an LLC, or a spouse or parent, the Plaintiff, if he obtains a judgment, can usually successfully get the conveyance undone as being fraudulent.
Second, North Carolina law does allow an individual's membership interest to be "charged," in pursuit of collecting a judgment. What this means is that if the LLC declares profits, and distributes the profits to members in proportion to their interests, the judgment creditor does have the right to intercept these payments by getting a "charging order" from a court.
"In this case, despite Plaintiff's attempts to have Defendant's membership interests in the LLCs seized and sold, his only remedy is to have those interests charged with payment of the judgment under N.C.Gen.Stat. § 57C-5-03." Herring.
However, a judgment creditor would be powerless to attach or charge any payments made by the LLC to the member as an employee of the company, any payments made by the LLC to the member for reimbursements, and any LLC property which the member may use (such as a company car, etc.).
In the example above, if Jim had incorporated as "Jim's Painting, LLC," the judgment creditor couldn't take Jim's company from him. At most, the creditor could obtain a charging order against any profits declared to Jim as a member. But you know what? Jim doesn't ever have to declare profits!
The long and short of it? The LLC can protect assets from an individual's judgments--so long as the LLC doesn't declare profits to the member, and the member hasn't used the LLC fraudulently as a holding tank to secrete assets.
Think about it...
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