15 Must have clauses to make an LLC Asset Protection Proof

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3rd Feb 2016

As you can imagine, no plan is 100% bullet proof. The key may be to a successful Asset Protection Limited Liability Company can be summarized by 15 key provisions which create an environment distasteful to a plaintiff seeking your assets. Asset protection planning is like a wolf hunting a skunk-The wolf knows it can kill the skunk-but at what price.

1. Clause to eliminate mandatory distribution.

This clause allows the manager not to make distributions from the LLC similar to a discretionary spendthrift trust.

2. Unequal or disproportionate distribution clause.

This clause allows the member manager to make substantially disproportionate distributions-not a forced pro-rata distribution amount.

3. Poison Pill

This allows the creditor to buy judgments for a nominal amount-or if a charging order is obtained in X amount it would be sold back at Y amount.

4. Restrictions on transfers of Members interest

This clause would prevent any non-current member from becoming a member.

5. Large percentage of ownership to change management

Keep control by having a large amount of membership to change ownership.

6. Decanting clause

Allow for the transfer of the assets to another jurisdiction if the corporation is under attack. This is widespread in international asset protection planning.

7. Have the LLC sponsor a pension or profit sharing plan.

Good to have an asset exempt under Federal law to fund in the event the company is under attack.

8. Mandatory capital contributions for members

Clever – make the new member or creditor pay dues if they become a member- make the dues significant-new members $100,000

9. Creditor cannot force the removal of a manager.

Make it clear that a creditor is just that-a creditor

10. No member interest may be assigned to a creditor

Put up a wall between the company and the creditor

11. Creditors have no voting rights

12. No member who has a charging order can force dissolution of the LLC

13. Dissolution or bankruptcy must be made by the member manager

Remember you do not want to go to bankruptcy court

14. No partition of assets without approval of member manager

Cannot partition and pay the creditor.

15. A member can file for personal bankruptcy and not be removed as a manager.

Make this clear in the agreement.

Although there is no bullet proof method to deter creditors, remember the skunk does not even use bullets.