In terms of new formations, the Limited Liability Company ("LLC") is the new King. The former King, the corporation, has been deposed, and relatively few corporations are now being formed other than for companies that have a future hope of being publicly-traded, or some other unique reason.
The Limited Liability Company has gained ascendancy because it offers the hope of relaxed management and bookkeeping -- there is no need for a Board of Directors resolution everytime somebody wants to go to the bathroom -- as well as simplified bookkeeping, partnership taxation as a default (though an LLC can "check the box" to be treated as a corporation for tax purposes, and even make an S-election), and numerous other benefits.
But doubtless a large motivation behind the formation of many LLCs, as with Limited Partnerships ("LPs") is that an LLC has so-called "charging order protection". In a nutshell, this means that if a member of an LLC becomes a debtor, the creditor does not get the assets of the LLC or even the debtor/member's LLC interest outright. A creditor is in fact prohibited by law from levying on the interests of an LLC, as a creditor is traditionally allowed do to the shares of a corporation.
Instead, the creditor can only get a lien against the debtor/member's LLC interest, which lien lasts until the judgment is satisfied. This means, more specifically, that a creditor gets a lien against what is known as the debtor/member's "economic interest" in the LLC, or, in English, a lien against whatever distributions that the LLC makes to the debtor/member, if any.
The charging order is widely misunderstood, so let me try to explain it. The charging order itself is not the lien; rather, the lien is what is placed by the charging order. Think of the charging order as a can of spray paint, and the paint is the lien. The charging order basically sprays the lien on the debtor/member's interest. Stated differently, the charging order is the vehicle by which the lien is placed on the debtor/member's interest -- it is not the lien itself.
Under the LLC laws of nearly all states, the charging order is the "exclusive remedy" that a creditor might employ to pursue the debtor/member's interest. Here, it is important to note that the term "remedy" in this context is a term of art, and not anything like the same as "outcome" which is how many planners misunderstand it. The charging order is the "remedy" that a creditor must use in this situation as opposed to other "remedies" as defined by a state's judgment enforcement laws, such as levies, garnishments, assignment orders, etc.
If a creditor has an alternative avenue to attack an LLC, such as by the assertion of an alter ego theory or whatnot, if it is not defined as a "remedy" then it is not blocked by the limitation of remedy to a charging order (which is sometimes called "charging order exclusivity"). Thus, there are cases where creditors have been able to circumvent the charging order procedure and either take the assets of the entity or get control of the debtor's interest to the same result.
The purpose of a charging order was traditionally not to protect the debtor/member's interest in the entity. Rather, the charging order procedure existed so that the other, non-debtor members of the LLC would not be forced into an involuntary business relationship with somebody's creditor or ex-spouse. This is important, for there are court opinions which have effectively held that if there are no non-debtor members in the LLC to protect, then the charging order protection should not exist. This most frequently occurs in the case of so-called single-member LLCs, i.e., where the debtor/member is the only member. But it can also occur when, for instance, all of the members are co-guarantors of the same loan that has been called.
But let's go back to the point that all the charging order does is to place a lien against the debtor/member's economic rights a/k/a rights to distributions. Because all the creditor has is a lien, the creditor is not a "member", and is therefore not liable for the taxes of the LLC that flow through to members. One of the biggest falsehoods in asset protection marketing of LLCs (and LPs) is that "the creditor doesn't get any assets, but gets the tax bill". To the contrary, if distributions are made to the debtor/member's interests, the creditor gets the cash, but the debtor still gets the tax bill (ouch!).
Some asset protection planners tell their clients something to the effect that, "even if your membership interest is charged, you can always get money out of the LLC by way of loans or salary, etc." While that may sound good in the comfortable surrounds of somebody's office, the reality is quite different. When charging orders are issued by courts, they are usually loaded with all sorts of provisions that specifically prevent the making of loans or payment of salary or fees, etc., to the debtor/member, or else treat those as distributions that must go to the creditor.
What happens in charging order situations is that, if the creditor cannot figure out any other way to get at the assets of the entity, a standoff results: The creditor can't get the assets out of the entity, but neither can the debtor. Whoever is more patient usually wins these standoffs, and it is often the creditor, especially if the creditor is an institutional creditor like a bank that doesn't have any immediate need for the money. Nearly all of these cases settle, but it is about as often the debtor who gets the short end of the stick because it is the debtor who is financially strangled -- it just depends on the circumstances.
There are many more nuances to charging orders; far more than I could discuss without writing lengthy tome on the subject. Suffice it to say that charging orders is a complicated area of the law, and even more complicated as applied to the peculiar facts of particular cases. But one should not just presume that a creditor will see an LLC and run away or settle for pennies on the dollar (as LLCs are often marketed), as that is rarely the case.
This article at http://onforb.es/10QxDbh and http://goo.gl/pkeT1
For a comprehensive treatment of charging orders, see https://chargingorder.com
