How Charging Orders Protect Nevada Businesses
Smart business owners set up business entities to run their business. This not only provides tax advantages as the money flows through the business and to the business owner, but it also provides liability advantages by blocking money from flowing from you through the entity to your entities’ creditors. Thus, there are tax and attachment advantages to setting up a business.
One of the reasons we set up a business entity to conduct business is for those attachment advantages: we want to separate the entities’ liabilities from our personal assets. If someone slips and falls while they are in your store, or if one of the trucks in your fleet rear-ends someone, you don’t want any judgment debtor to be able to access your personal assets. And as long as you’re observing corporate formalities and keeping entity assets and liabilities separate from your own, that’s exactly the kind of protection you get.
But what about your personal liabilities? If you’re the one who rear-ends someone, or if an old credit card debt sneaks up on you, judgment debtors are entitled to execute on your assets. They can garnish your bank account, put a lien on your house, or take your tangible property. But what about your entity? You own it, don’t you? So can they take it from you?
Not in Nevada. In fact, in most states, forcing the sale of your shares or membership certificates is not allowed. This is called a charging order.
A personal creditor who wishes to go after entity assets must do the following:
File a lawsuit
Serve the complaint and summons on you personally
Gather enough evidence to prove the debt
Prove the debt at trial to the preponderance of the evidence standard (or before trial at a higher standard)
Obtain a judgment from the judge or jury
File and win a motion to obtain a charging order based on the judgment
The entity can be a corporation, and in Nevada, it can also be an LLC. That entity is immune from the judgment, and is only subject to the charging order. That charging order is a court order that directs the entity to take those distributions it would have made to the judgment debtor (you), and make it to the judgment creditor instead.
Charging orders were originally created to protect the other owners of the entity from judgment creditors personal to you being able to either (1) take over ownership of the entity, (2) take over management of the entity, or (3) both. If a judgment creditor—a credit card company or perhaps your ex-spouse—took over management or ownership of the entity, it could have a drastic effect on the other owners, who are blameless.
So charging orders were created to limit that and create one remedy—the exclusive remedy—which is taking assets that would have gone to you anyway. That’s a charging order.
Although most states provide some manner of charging order protection to business entities, Nevada goes farther to protect entities. For one, it affords charging order protection to even single-owner LLCs. That means even if you don’t have partners or co-owners who might be negatively affected by your personal debt, the charging order is still the exclusive remedy.
There are ways to use a charging order to your advantage. Contact us if you need more information.
See NRS 78.746 (corporations) and NRS 86.401 (LLCs) for more on charging orders in Nevada.