LLCs offer two different types of protection from creditors:
Inside protection means that generally creditors of the entity, cannot get the personal assets of the entity’s owners for debts of the entity.
Outside protection generally means that creditors of an LLC owner cannot get the LLC interest of a owner, nor the assets of the LLC.
However, there are exceptions to the rules.
More broadly, a limited liability company among family members has several tax and asset-protection uses.
More specifically, the asset-protection aspects involve the following:
- Providing a shield of protection to LLC owners from LLC creditors;
- Shifting income to and among family members and away from LLC members with personal debt.
- Sharing assets with family members (i.e., if the debtor does not own the asset, the creditors cannot reach it).
- Valuation discounts (e.g., for minority interests, lack of marketability) relative to LLC interests (i.e., the value of a properly structured LLC interest is generally much lower than the proportionate value of the underlying partnership assets) making the LLC interest less attractive to a member’s personal creditors.
- The charging order limitations that shareholders of a corporation do not have.