Investment Assets can be protected by an LLC from claims of outside creditors. But, how well the assets are protected depends on the law of the state in which the LLC was organized. Recently, practitioners have debated about LLC statutes of various states. For those planners pondering which is the best state in which to form a LLC for their clients, this article may offer some helpful guidance:

Laws in the state of Delaware and most other states allow a creditor of an LLC member to foreclose on the debtor’s interest. This should be compared to the states of Nevada and Alaska, which provide that a creditor’s only remedy is a charging order against the LLC interest. However, it should be noted that, according to an attorney from a southern state, benefits from state laws making a charging order the exclusive remedy may be overstated. Even if a creditor can foreclose on a debtor’s LLC interest, the creditor is unlikely to do so because a purchaser at a foreclosure sale obtains no management or voting rights. Also, a purchaser at a foreclosure sale is more likely than the hold of the charging order to suffer adverse income tax consequences.

A west coast attorney agrees that a creditor may be worse off as the assignee or owner of a LLC interest than as the mere holder of a charging order, while an attorney in the southwest feels that availability of the foreclosure remedy should not be the only factor considered in selecting LLC jurisdiction.

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