Under general common law principles, a judgment creditor can impose on the personal property of a debtor. In other words, to satisfy his claim, the creditor can sell the property. Therefore, if a creditor has a judgment against you and you own all of the shares of stock in a corporation (and that corporation owned significant assets), the creditor could execute (or impose) on your shares, become the owner of your corporation, and liquidate it in order to get at its assets so his claim would be satisfied. It’s quite different with limited partnerships. Here’s why:

In a limited partnership, the judgment creditor of a partner has only one redress, known as a charging order. A charging order effectively limits a creditor's ability to reach partnership assets. A charging order under the Revised Uniform Limited Partnership Act (RULPA) places the judgment creditor in the position of an assignee of the debtor partner's ownership interest in the partnership. Under RULPA, an assignee has none of the partner’s rights in the limited partnership: he isn’t allowed to vote on partnership matters, he cannot view the partnership's books and records, he cannot reach assets owned by the partnership, and he cannot sell or foreclose on the partnership interest. So, you may ask the question: what exactly does the creditor get under the charging order? What the creditor gets is the right to any partnership distributions which would have otherwise been paid to the debtor partner if and when they are made. Who decides as to when those distributions are made? You do! Additionally, the IRS says the creditor is liable for paying the federal income tax on the share of the partnership income subject to his charging order - even though it’s not distributed to him! This is what is referred to as the "outside in" protection afforded by the limited partnership

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.