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Corporation v. LLC for Asset Protection - the Jonas Case

There is often discussion among business attorneys as to which entity provides the best protection against creditors, the corporation or the limited liability company (LLC). When there is one owner of the entity, many attorneys will champion the LLC citing applicable statutes which say that the only remedy available to the creditor of an LLC owner is a charging order, and that the stock of a corporation (with one owner) is much more vulnerable to creditor claims as a result.

As applies to single owner LLC’s, this claim has been weakened by a few Bankruptcy Court cases in the past several years. In 2003, there was a Bankruptcy case out of Colorado, In re: Ashley Albright, Debtor, Case No. 01-11367 – ABC, Chapter No. 7 (2003 Bankr. D. Co. LEXIS 291), in which the Bankruptcy Court held that the Single Member LLC was an asset available to the creditors of the Bankruptcy debtor. More recently, a case out of Montana, In re Jonas, 2012 WL 2994724 (Bkrtcy.D.Mont., Slip Copy, July 23, 2012), came down the same as Albright, leading many to speculate that the single member LLC has limited asset protection use (similar to a single owner corporation). The implication here is that there does not appear to be much of a difference between an LLC with one owner and a corporation with one owner once the Bankruptcy Courts get involved, casting doubt about whether one entity type is preferable to the other in terms of asset protection.

It is important to note that these cases do not stand for the proposition that single member LLC’s, or single shareholder corporations, have no use. These cases deal with a Bankrupt owner, not with a troubled entity, where the outcome would likely be different. For example, if the LLC in Albright or Jonas were the debtor in Bankruptcy, with the creditors attempting to get at the personal assets of the business entity owners, the LLC’s would likely have shielded the owners from those creditor claims.

There are many reasons to form an LLC or a corporation, with asset protection and tax minimization among them. If you would like to talk to an attorney at Penzien & McBride regarding the benefits of incorporation (or LLC formation) please call (586) 690-4400 or leave a message at our Contact page.