No, that’s not a joke. Landlocked South Dakota doesn’t have anything to compare to Alaska’s spectacular coastline or the reefs and beaches of the Cook Islands, a nation of 15 islands in the middle of the Pacific Ocean. Its prairie lakes and Missouri River bluffs, however, are beautiful in their own quieter way.
Something else these three places have in common is being some of the best jurisdictions in the world for asset protection strategies. One of the protections each of these jurisdictions offers is an express provision in their LLC statutes clarifying that charging orders are the exclusive remedy for a creditor of an LLC member.
Why is this such a big deal? In the recent case of Olmstead v. Federal Trade Commission, the Supreme Court of Florida sent asset protection specialists into cardiac arrest by disregarding the charging order protection in the case of a single-member LLC (SMLLC).
This decision removed, at least in Florida, the main benefit of using an LLC. Asset protection advisors use LLCs as one of their favorite tools because of the protection they give against judgments by what is known as a “charging order.”
A charging order prevents a creditor of an LLC member from grabbing the assets of the LLC by providing a way where the creditor “steps into the economic shoes” of the debtor-member. Any future distributions of profits or dividends accrue to the benefit of the creditor until such time as the judgment is satisfied.
The creditor’s only right is to receive any distributions the LLC makes to members. The creditor has no right to control, vote, participate, or otherwise compel such profit distributions. The great benefit of the charging order is that there is no requirement for the LLC to actually distribute profits to satisfy a judgment. It is possible, if there are never any distributions, that a creditor holding a charging order may never collect anything.
Only two states, Alaska and South Dakota, specify in their statutes that no other remedies except the charging orders are available to a court in satisfying a judgment against an LLC.
In jurisdictions outside the United States, the Cook Islands have the best statute to date for SMLLCs. This is according to an article written by Jim Duggan, M.B.A., J.D., of Duggan Bertsch, LLC. He states that The Cook Islands Limited Liability Company Act is the first act to specifically incorporate SMLLCs by reference when stating that a charging order is the “exclusive remedy.”
The Olmstead case has not nullified the protection that SMLLCs offer. What it has done is emphasize the importance of locating these LLCs in the right jurisdiction. This is one more reason that anyone who needs complicated asset protection strategies is well advised to work with a professional who specializes in asset protection. Not all financial planners or attorneys are knowledgeable in the details that are so important in this field.
The bottom line is if you are using a SMLLC, it is very important that you use a jurisdiction with statutes that state a charging order is the exclusive remedy for the court. Currently, those jurisdictions are Alaska, South Dakota, and the Cook Islands.
Establishing an LLC, of course, doesn’t require you to travel to the jurisdiction you choose. A personal visit is always an option, though, if you’ve always dreamed of vacationing in a tropical island paradise, cruising Alaska’s coastline, or seeing Mount Rushmore. If you do visit South Dakota, be sure to check out the scenic shoreline.