If you are a visitor to this blog, please see our prior blogs containing an extensive discussion of the types of business entities, the structure of LLCs, investing in real estate using LLCs, and collecting a judgment from LLCs. You may also want to read this introductory note on asset protection methods before reading further. This article will focus on some of the key asset protection clauses that a careful business owner ought to consider having in his LLCs Operating Agreement.
Eliminating Mandatory Distribution Clauses. A typical LLC operating agreement contains a mandatory distribution clause wherein the manager or member makes distributions of profits at certain regular intervals. By having a clause that eliminates mandatory distributions, the manager or member can then make discretionary distributions that operates a lot like a spendthrift trust.
Restricting Transfers of Membership Interests. Restricting the transfer of LLC membership interests by members would ensure against any non-current who is not a good fit for the company from becoming a member of the LLC at some later time. This does not mean that existing/current members cannot sell their membership interests. Rather, existing members would still be allowed to withdraw as members, but they would be able to either have the LLC redeem their membership interest, or have the other existing members do a cross-purchase.
Mandatory Capital Contributions for New Members. Existing Members may want to consider adding such a clause, which mandates that new comers in the business pay their dues before making member.
Decanting Clause. This clause allows the LLC to start transferring assets to another jurisdiction if the corporation is under attack from creditors. This clause can also be used as a defense to potential fraudulent conveyance claims that often arise under such circumstances.
Creditor Cannot Force the Removal of A Manager. The operating agreement should make it clear that any judgment creditor of the LLC cannot remove the manager.
Creditors Have No Voting Rights. Make sure that a creditor does not have any say in the management of the LLC. In other words, a creditor is just a creditor, with no management or other rights with respect to the company.
No partition of Assets Without Approval of Member Manager. This deters a creditor of the LLC from partitioning the LLCs assets to get paid.
Member Interest Cannot Be Assigned to A Creditor. This effectively puts up a wall between the creditor and the LLC.
Personal Bankruptcy of Member. Make sure the operating agreement is clear that the personal bankruptcy of a member does not remove him as a manager.
Preventing A Member or Creditor with a Charging Order from Seeking Dissolution. The operating agreement should be clear that any member or creditor who has a charging order against the LLC is not entitled to dissolve the company.
For more information on LLC structuring and asset protection methods, please contact Fox & Moghul to discuss your matter.