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I've seen this questioned asked the opposite way a number of time, but I've not seen it the other way around. Lets say I own a million dollars in real estate in an LLC. If someone has a grievance against me personally, let's say the were attacked by my dog or something and they have a valid case against me personally, can they then go and sue me for the assets in the company I own?

  • Welcome to the site! This likely has something to do with what state you live in. Can you specify? – OldBunny2800 Jul 27 '17 at 17:04
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A business owned by a debtor is not itself liable for the debts of its owners.

But, a membership interest in an LLC is one of your assets and is normally not exempt from creditors, so legal process may be used to collect a money judgment obtained by a creditor in a suit against the membership interest owner from this asset.

There are several ways of doing this that a creditor can utilize, each of which is discussed below.

Charging Orders And Writs of Garnishment

The presumptive way for a judgment creditor to collect a judgment from a debtor's LLC membership interest asset to do this is to either garnish any monies the LLC owes to you with a writ of garnishment (so that the LLC would pay the amounts due to the debtor to the creditor instead), or to impose a "charging order" on the LLC interest, which is like a writ of garnishment that remains in force until the full amount of the debt authorizing the charging order is satisfied.

The downside of a writ of garnishment or charging order is that the people who control the LLC can often defer distributions to the members indefinitely, which deprives you of the funds that would otherwise have been distributed to you, but doesn't let the creditor have those funds either.

Some LLCs require that certain distributions be made to owners and require that the LLC be liquidated under certain circumstances (e.g. the completion of a real estate development project). But, those LLCs are the exception rather than the rule. Normally, an LLC only makes distributions to its members when the people who control that LLC decide to do so by a majority vote of the managers or of the managing-members as the case may be.

Writs of Execution Directed To Membership Interests

There is a split in authority between states (with many states not having resolved the issue) over whether you can enforce a money judgment against the owner of a membership interest not just by collecting money due to the owner as a result of the membership interest and instead use a writ of execution to seize the membership interest and sell it in a sheriff's sale to whomever bids at the sale (much like someone might seize a parcel of real estate or a car to pay a debtor's debts to a judgment creditor).

In most states, even if this is allowed, the buyer at the auction gets the right to distributions from the membership interest seized, but not a vote on how the business of the company is conducted, unless the other members agree to grant the new owner voting rights or the operating agreement of the LLC provides otherwise.

All of the remedies so far presume that the asset to be collected out of consists of the ownership interest in the LLC (analogous to shares of stock) rather than the assets of the LLC itself.

Reverse Piercing

Seizing assets of the LLC itself, rather than merely the ownership interest in the LLC, is called "reverse piercing". Usually, reverse piercing is not allowed. But, there are some circumstances where reverse piercing is sometimes allowed.

Almost all jurisdictions allow reverse piercing in some circumstances, but those circumstances vary considerably from state to state based upon both the language of the relevant LLC statute and the relevant case law.

There are four main circumstances that justify reverse piercing.

Single Member LLCs

One is the case of a single member LLC where the creditor obtains ownership of 100% of the LLC. In these circumstances, courts have allowed creditors to dissolve the LLC and reach its assets, because neither the debtor nor any third party other than the creditor has any legitimate ownership interest in the property.

Alter Ego Cases

Another is the case where the assets of the LLC and the personal assets of the debtor are co-mingled or there is not clear documentation existing prior to the litigation establishing which underlying assets belong to the LLC and which belong to its owner. In these cases, reverse piercing is allowed because the existence of a company identity has been disregarded and there is no de facto distinction between company assets and personal assets. This justification for reverse piercing is sometimes called an "alter ego" theory.

Fraudulent Transfers

A third case where reverse piercing is allowed is where the contribution of the asset to the capital of the LLC was a "fraudulent transfer" from the individual debtor to the LLC (e.g. if the $1 million parcel of real estate was sold to the LLC for $100 at a time when the debtor was insolvent or rendered insolvent as a result of the transfer).

Contributing an asset to the capital of an LLC in exchange for a membership interest with a capital account in the LLC's books set based upon the fair market value of the asset contributed to the LLC is usually not considered a fraudulent transfer, but could be in particular facts and circumstances where it has the intended effect of hindering creditors or concealing an asset.

Equitable Reverse Piercing Based Upon Control Of The Entity

A fourth case where reverse piercing is sometimes allowed is where the debtor does not own 100% of the LLC but has the ability to dissolve the LLC or force its assets to be distributed in kind to him, without the assent of the other LLC owners, because the debtor controls the LLC. Whether this is allowed or not is another issue upon which there is a split of authority and in many cases simply an absence of authority which would make such a case one of first impression in a state.

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They cannot sue your company directly. But they can sue you personally. If a court decides that you owe this person $20,000 because they were bitten by your dog, and you have no cash, then you have the duty to find the cash. How you do that is up to you. You could ask your bank for a $20,000 loan. You could ask the company to pay you an additional say $30,000 salary (on which you would pay income tax, so there's say $20,000 left, which you hand over). You could ask the company to pay you a large dividend, which you also would have to pay tax for. You could ask the company to give you a loan, which you would have to repay.

What you cannot do is just not paying in that situation. The person suing cannot force the company to do something, or get some of their assets, but they can force you to get the cash in any legal way possible.

You, on the other hand, cannot just let the company make the payment, reducing its profits and therefore the amount of taxes it owes to the tax office. The company must make a payment to you, which you have to handle properly.

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