Research Handbooks in Corporate Law and Governance series
Edited by Robert W. Hillman and Mark J. Loewenstein
Chapter 9: Attacking asset protection LLCs
The oft-recited justification for the explosive spread of LLC statutes throughout the United States is to enable business owners to limit their personal liability for debts of the business and at the same time obtain partnership-style tax treatment of the business’ income. It is therefore a bit surprising to stumble across a law review article describing how its author uses an LLC to hold his vacation home (Callison 2011). In fact, this is illustrative of a cottage industry in which individuals have created LLCs to shield assets they personally use from their personal creditors, rather than to operate businesses. It is now generally accepted that using legal entities to shield their owners from business debts can produce an efficient allocation of business risks. The social utility of using such entities to allow individuals to shield assets held for personal use (such as vacation homes) from their personal creditors, however, seems far more problematic. True, state laws (through homestead exemptions and the like) commonly exclude some assets (or value in the assets) from seizure by creditors. Also, creditors might voluntarily agree to limit the assets to which they can look to satisfy their loans. The use of LLCs to shield personally used assets from personal creditors, however, reflects no such carefully considered legislative policy of insulating a few critical assets from creditor claims, nor is it a highly transparent means of obtaining creditors’ agreement delimiting the assets subject to their claims.
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