formalities are followed, a personal creditor of the client cannot access the assets in the LLC or LP. Likewise, a creditor of the LLC or LP cannot access the client’s personal assets. LLCs and LPs separate assets and liabilities by putting up a ‘firewall’ to limit the potential exposure to our clients’ assets. The protection provided to LLCs and LPs is due to a creditor’s exclusive remedy under certain states’ laws being limited to a ‘charging order’. A charging order only permits a judgment creditor to await distributions intended for the debtor from the LLC or LP. Since the charging order is the exclusive remedy, this means that the creditor cannot make any management decisions or force any distributions. Thus, the creditor has a piece of paper entitling the creditor to distributions, if any are made. Since the debtor has control over distributions, the debtor will not make any distributions given this scenario. A lot of thought and strategy goes into separating assets and liabilities amongst various LLCs and LPs. The more assets in an individual LLC or LP, the greater the potential of loss if a lawsuit were to result from ownership in one of the assets in the LLC or LP. For example, if a real estate investor owned three rental properties in a single LLC and a tenant was injured on one property and got a judgement, the equity in the other two rental properties may be available to the creditor. How do trusts protect assets? Similar to how LLCs and LPs can put THOUGHT LEADER 67 The more assets in an individual LLC or LP, the greater the potential of loss if a lawsuit were to result from ownership in one of the assets in the LLC or LP.
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