Liabilities exist around every corner. As such, many of our business clients focus on liabilities that stem from the business. You know these, right? We’re talking about slips and falls, creditors, bad workmanship, auto accidents, employment disputes, and the like. We call these, “bottom-up” liabilities. In this article we want to talk about another type of liability. Personal liability, which we call “top-down” liability and the charging orders they can create.
What is a Top-Down Liability?
Top-down liabilities are personal liabilities. These could be personal loans, personal injury judgments, child support obligations, or other liabilities we incur from just being alive. They are liabilities that stem from our personal lives, not our business lives.
It is important to distinguish these from business liabilities. Typically, we create business entities to shield our personal assets from business liabilities. Hence, the formation of LLCs, Partnerships, and Corporations. These entities will, usually, protect us from business debts and liabilities. However, they do not protect us from top-down liabilities.
How Top-Down Liability may Impact Your Business Interest
First, business interest is personal property. Personal property is generally anything you own, other than land. In this sense, business interest is similar to your bank account, car, cash, and nearly everything else you own.
Second, if you are held personally liable for a debt or judgment, then your personal property may be subject to pay that liability. This is typically accomplished through some sort of post-judgment action by the creditor. Examples include things like liens, foreclosure actions, and charging orders.
What is a Charging Order?
A charging order is a post-judgment remedy for creditors of individual debtors who hold interests in LLCs or Partnerships. The charging order essentially assigns the debtor’s ownership interests to the creditor. Consequently, when the business pays dividends, the debtor’s share is handed over to the creditor until the debt is satisfied.
Keep in mind, the assignment does not give a creditor the right to interfere with the business’s operations or to make business decisions.
However, a judgment creditor may have additional remedies if the business is a partnership or limited partnership. In both of these types of entities, a creditor may request a foreclosure and court-ordered sale of the charged partnership interests. This, of course, could create some serious problems for the business. Conversely, the creditors remedy of foreclosure and court-ordered sale does not apply to membership interests in an LLC under current Missouri law.
You should always consider bottom-up and top-down liabilities when structuring your business. Bottom-up liabilities are typically managed through entity selection, liability insurance, and various legal agreements. Whereas, top-down liabilities are typically managed through entity selection, ownership decisions, and drafting internal mechanisms to deal with charging orders, bankruptcy, and other personal liabilities (like death, disability, and divorce). We strongly encourage you to speak with your business attorney about both types of liability and ways to protect yourself and your business.