The charging order protection
allows you to make a hostile creditor responsible for taxes although he
didn't yet receive a distribution from your LLC. The hostile
creditor thinks he won but quickly recognizes that he must now pay taxes
on income not yet received. This process is explained below.
For this charging
order protection to be most effective, the LLC must
- Have at least
two (2) members [Important!] Managers can be people or another
- Be taxed as a
by a manager, not the members. [Important!]
Assets Are Made Unattractive To The Creditor
The manager of the
LLC can refuse to distribute the earnings. (If the operating agreement
so allows.) What is the advantage of withholding the distribution from
the hostile creditor?
This means that the
creditor is now liable for income taxes on those LLC earnings, whether
or not they’re distributed. The hostile creditor is now liable for
taxes on earnings not yet received or for what is typically referred to
as “phantom income.” This places the member in a stronger position to
negotiate a favorable settlement. Hostile creditors don’t want to pay
taxes on earned income that’s out of reach.