The following is a conversation I recently had with a prospective client named John regarding why he should consider a Nevada limited liability company for asset protection. John is a real estate investor who wanted information on the benefits of using a holding LLC to protect his existing rental LLCs.
Clint: John you should create a Nevada LLC to hold your exiting and future LLCs. The Nevada LLC will provide an additional shield should someone be foolish enough to sue you and it will minimize the number of tax returns you must file each year.
John: What makes Nevada so special? I have read about Wyoming, Delaware, and Alaska and being alternatives that are less expensive.
Clint: You are right; these states are less expensive however, when considering asset protection is saving an extra $200 per year worth it? When you break it down it amounts to 54 cents a day for the added protection Nevada offers. I guarantee you that if you are involved in a lawsuit you will wish you spent the extra change each day.
John: But what does Nevada give me over the other states?
Clint: For starters, the best charging order statute in the country:
If that is not enough, Nevada is the only state with business courts. These courts only preside over controversies related to businesses. Thus, the judge is far better suited to interpret and understand these laws than one who does not deal with these matters on a daily basis.
John: Ok but has it been tested?
Clint: John funny you should ask because just this month the Supreme Court of Nevada (“NSC”) had the opportunity to address this issue in Weddell v. H20, Inc..
In Weddel v. H20, Inc., two longtime business partners started a venture to develop geothermal energy, and formed several companies, including two limited liability companies. One of the partners, Weddell, alone became embroiled in an unrelated lawsuit that was to eventually to mature into judgment against him by H20, Inc.. H20, Inc. then sought a charging order against Mr. Weddell’s LLC interest. The lower court granted the charging order and then proceeded to divest Mr. Weddell of his control over the LLC. Mr. Weddell appealed the decision and argued that the Court could not divest him of his control over his LLC.
After an extensive discussion of the history of the charging order the NSC it reversed the lower Court. In its holding the NSC stated: “By limiting a creditor’s right to exercise the debtor member’s management rights, we ensure that creditors of a limited-liability company cannot disrupt and interfere with the management rights of other members. This conclusion rests on the uncontested right of a member to choose his or her associates and to encourage investing by enabling limited members to invest money and to share profits, but without risking more than the amount they contributed."
Then the court concluded: “After the entry of a charging order, the debtor member no longer has the right to future LLC distributions to the extent of the charging order, but retains all other rights that it had before the execution of the charging order, including managerial interests.”
This recent opinion should put to rest any question of Nevada’s commitment to protect LLC members from their personal creditors. The Nevada charging order statute only provides a creditor with the right to distributions and nothing else, leaving control in the hands of the LLC members.