Single Member LLC – Charging Order – Creditor Claims, Pass-Through

Recently I’ve run across some significant issues with the single member LLC’s with courts handing down noteworthy judgment decisions in favor of creditors using the theory of “fraudulent transfers” and “civil conspiracy.” I ran across two such individuals that have made me more caution on client advice regarding single member LLC’s.


The LLC is a TAX HYBRID “pass-through” legal entity similar to a partnership but with the limited liability of a corporation. The LLC is tax-driven and was classified legally by the IRS on January 1, 1997 when the IRS threw out its old, and unnecessarily complicated, business entity tax classification regulations and agreed that LLCs should be taxed as partnerships (or sole proprietorships if they have one owner) without jumping through a number of technical hoops. Moreover, the IRS now lets an LLC elect to pay taxes as a sole proprietorship, as a partnership, or as a corporation by filing IRS Form 8832.

For “Income Tax purposes” income and expenses of the LLC “pass-through” directly to your income tax return proportionate to your percentage of ownership, or if there is more than one member, whatever percentage you decide, for example, 50/50 or 75/25. Irrespective of your equity ownership percentage, this is a significant advantage over other forms of business entities, and the LLC also has another significant advantage; members decide how they want to be taxed or, in other words, as sole proprietor, partnership, or corporation. The LLC will obtain it’s own Federal Identification Number (similar to a social security number), operate as a business, and maintain it’s own bank account.


Ninety percent of financial advisors give the wrong advice regarding single member LLC formations. Single member LLC are mistakenly assumed to protect the member from the creditor. Most financial LLC advisors state that a Limited Liability Company (LLC) protects the owner (i.e. single member LLC) against present, past, and future creditors because the creditor may not step into the shoes of the LLC and has to look at the LLC member for collection.

The advisors point to an IRS Revenue Ruling (77-137), where the creditor holding the “Charging Order” will receive the “K-1.” They further explain, the creditor must pay the taxes on the income generated by the LLC, even though the creditor never receives any actual cash from the business. The creditor saddled by the charging order is treated as a “substituted limited partner for tax purposes” and will suffer the tax consequences without capacity to force payment, dissolution, or distribution of the LLC.


The area of the laws surrounding the issues of the charging order to protect the single member LLC is dynamic and evolving. There’s no legal reasoning for a charging order protection for single member, even though most state statutes call for such protection. The charging order protection cannot create a “personal legal liability” out of a legal business entity for “the acts” of the LLC.

There are several litigation issues unique to the LLC that are beginning to emerge in trial forums. State LLC laws, when written, were primarily tax driven, and accordingly, they defined key terms and concepts in accounting and tax terms, and not with thought of contract tort law issues. When the LLC is in financial distress, litigation will usually focus on:

A. Dissolution issues,

B. Capitalization issues,

C. Failure to comply with state statutory and regulatory requirements, and

D. Violation of one or more provisions of the entity’s documents.


The central issue to single member LLCs (one owner) is “FRAUDULENT CONVEYANCE” which, if not handled properly may become part of a “civil conspiracy” to fraudulently act against creditor claims. In some cases the financial planner, lawyer, or accountant becomes part of the conspiracy and in some cases such advisors have been reprimanded.

Single shareholder corporation, single shareholder of Sub “S”, and single member LLCs can provide the owner with protection against liabilities arising from “the conduct of the LLC” but not the owner of the LLC membership shares. In other words, “if” the LLC does something wrong, the owner is not necessarily responsible. To reach the owner’s personal assets, a plaintiff would have to “pierce the veil” of the entity showing that:

A. The LLC, the corporation, or the Sub “S” was under capitalized for it’s intended business purpose,

B. Formalities were not followed,

C. The owner used the LLC, Corporation or Sub “S” mostly for personal purposes,

D. It did not serve a “bona fide” commercial purpose,

E. It lacked in economic substance and was merely an alter ego of the owner whose sole intention is to frustrate the creditor(s), etc.

A single member LLC (one owner), Corporation, or Sub “S” will not protect the owner, because the charging order protection that is much touted, is based on protecting the “innocent” non-debtor.

Under the Uniform Fraudulent Transfer Act you would be committing a crime, see Section 19.40.041:

“…(a) a transfer made or obligation incurred by a debtor is fraudulent as to a creditor whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay, or defraud any creditor of the debtor…”

How To Generate More Customers In Your Legal Shield Business

Generating customers and reps for your Legal Shield business doesn’t have to be as difficult as you may think. Because lawyers and attorneys are always in high demand, it is relatively easy to strum up business and members for your MLM based business opportunity. Legal Shield is a multi-levelmarketing program that has been around for over 40 years. It was previously known as Prepaid Legal. The service is very simple – members pay a monthly subscription fee and after this they receive access to the member’s area. From this spot they have access to thousands of different lawyer and attorney services in their area, sorted and categorized accordingly.

In addition to having access to the massive listing of lawyers and attorneys in your area, members will also receive major discounts on all the legal services they need. Additionally they will get 1 free phone consultation and one free face-to-face consultation with the lawyer of their choice. They will also receive one free document review and a few other perks. Lawyers join Legal Shield because it greatly expands their client base, and because they will have a higher volume of work they can accept the discounted prices they receive.

Read below to learn the best ways to generate customers and reps for your Legal Shield marketing network:

Target People with Legal Problems

While this may seem a bit unethical, you must remember that marketing is a cutthroat business and your lost customer is another marketer’s $500 paycheck when all is said and done. Because you’re selling a service that offers free or discounted legal services it would make sense to target people that are in need of legal service. People going through divorce, going through a real estate deal, or have trouble with the law are all good candidates for recruiting into the program. Emphasize the fact that they will receive a free phone consultation as well as a free one-on-one consultation with the lawyer or attorney of their choice after they join the program.

Emphasize the Need for Legal Services

Many people may think that creating a will, transferring a deed or selling a piece of property can be done quickly and easily, without the aid of a lawyer or attorney. In reality, virtually everything these days requires a lawyer of some sort, or at least a notary for an official signature. When attempting to recruit people to join Legal Shield you must emphasize the growing need for legal services, and how joining Legal Shield will entitle them to a variety of services they can receive either for free or for a steeply discounted price. Entice people to join by reminding them of the free phone consultation and face-to-face meeting they get with a real lawyer after joining. Also remind them of the free document reading and proofing they will receive. Attracting more customers and reps for your Legal Shield business is easy when you capitalize upon their problems or fears. Target people who are currently in legal trouble, and remind them of the bonuses and incentives they will get.

Secret Tip!

Nowadays people are doubling and tripling their recruiting online and it starts with learning how to be an efficient Internet Marketer.

1. Learn How To Send Traffic To A Website

2. Create a website that captures your traffic name and email

3. Email the people who opt in to your website and share your opportunity over and over…

Prepaid Legal – Business Opportunity Review

Prepaid Legal Services is a company that has been offering legal service and a business opportunity to North American families for many years. Legal counsel and advice from qualified lawyers is available to all and every member with just a call to their toll-free number. Many people find Prepaid Legal services a preventive solution to an unforeseen legal affair. However, there are those that consider the company simply because of the potential profit. In this review we will be focusing only on the business opportunity and compensation plan.

Prepaid Legal is considered to be one of the biggest network marketing companies ever. Their business opportunity is a multilevel marketing design, also viewed as a pyramid structure. It is a tiered compensation plan where distributors can build a downline to earn residual income. As a member you can also make commission from direct sales, plus ongoing compensation for all active members enrolled by you. Override commissions are also given when others in your organization sign up new members. Prepaid Legal believes their business opportunity is designed so that anyone with an honest desire for success can do it, regardless of background or experience.

Prepaid Legal has been around for quite some time and still teaches the same method of approach to reach success. Their business opportunity encourages distributors to grow using their so-called warm market method by sharing the membership with those that you relate with every day such as family, friends and work colleagues. They also teach their members to use the 3 foot rule, which means they are supposed to talk to anyone and everyone within 3 feet around them about prepaid legal services and their business opportunity.

I believe one should take advantage and even take risks when it comes to a business opportunity. However, taking risks does not mean doing the same thing over and over and expect the same result when times have changed. One has to adjust with change to be able to achieve success in today’s market. The fact is that anyone and everyone could certainly make a lot of money and be very successful marketing prepaid legal services, all with the right knowledge and skills to advertise and promote in today’s market.

Learn the Differences Between Each Legal Business Entity Type

Your individual state will register your legal business entity, and it’s important to understand that not all states recognize every business entity type. The descriptions below are meant to give you a basic understanding of the differences between entities, but you should check with your local government to see which type of business designation is right for your new venture.

Sole Proprietorships

Most small businesses choose the legal business entity of a “sole proprietorship”, where one person is the only “owner” of the business. Legally, there is no difference between you and your business, and while this business entity type is preferred by some because of the ease in setting it up and registering it, there is a greater legal risk assumed by the owner of a sole proprietorship. For example, if someone sues your business for infringement or fraud, they will be suing you, and your personal assets will be on the line if the case is taken to court – a disadvantage to this kind of legal business entity. This type of situation is rare to be sure, but from a business standpoint, it has the potential to be a risky move.

An advantage of this entity is the fact that you’re the only owner! You can make your own business decisions without having to consider the opinions of a board of directors, or other stakeholders. You receive 100% of the income from your business, and are free to file your profit on your individual tax return at the end of the year – a huge advantage to choosing this legal business entity type.


As the name implies, a partnership is an entity in which two or more people own a business together. Just like a sole proprietorship, there is no legal difference between the owners / members of a partnership and the business itself. As previously stated, choosing this legal business entity can have potentially negative consequences if someone were to file a suit against you or your business. An entity type of this sort carries an additional risk because of the added element of another person. For example, let’s say your business partner did something illegal and the court has decided to penalize your business assets because of his or her mistake. Although you have done nothing wrong, the whole business may be at risk of going under because of the partnership liability. Again, although this is rare, it is important to consider when choosing this kind of legal business entity. Types of considerations like this can protect your investment in the long run.

Speaking of investment, an advantage to a partnership is the ability to raise more funds with the influence of more people. Instead of having to shoulder all of the capital upon startup yourself, a partnership can help business owners divide the cost of operational expenses. And of course, because you’re sharing costs, you and your partner(s) will have to share profits as well. A benefit of this kind of legal business entity is the financial ease achieved by being able to file your profits under your individual tax return at the end of the year.

When starting a partnership, it is important to draw up a legal agreement detailing how costs and profits will be shared, what to do in the event of a partner wanting to leave the business, how to settle disputes about business strategy, etc.


Unlike sole proprietorships and partnerships, where the owners are legally the same as their business, corporations offer business owners a unique legal and tax benefit in the sense that corporations are granted their own legal status. Therefore, this business entity type is considered as a separate legal business entity from you, your partners, and your shareholders. If your business were to be sued, it would not put you or your personal assets at any risk. So wait…who are shareholders? Whereas you’re an owner / operator / member of your sole proprietorship or partnership, you become a shareholder in a corporation, because this type of business operates with stock, or partial ownership distributed amongst several people. As a shareholder, you “own” a part of the business, but you also have to routinely answer to a board of directors who steer the direction of the company.

The downside to the legal business entity of a corporation is that you have less individual freedom to make executive business decisions, and you are not in total ownership of your business. This business entity type is more difficult to begin and dissolve, and often must comply with a series of complex federal and state regulations and taxes. However, the obvious benefit to this type of legal business entity is that you have more individual legal protection with the separation of yourself from your business in the event of a lawsuit.

Limited Liability Company (LLC)

Finally, a Limited Liability Company (LLC) is a sort of combination of all of the above business structures. Like the “corporation” business entity type, an LLC offers a legal distinction between a person and their company, but like a sole proprietorship or partnership, it offers the owner or member (we’re back to being called members now) control over business decisions, tax breaks, and offers no stock option. There is no limit to how many members an LLC may have, and it is also possible to just have one member. The obvious upside to this type of legal business entity is that it provides the best parts of both worlds, corporation and non-corporation, but the downside is that it is more difficult to file than a partnership (but is still less difficult than forming a corporation). To date, the federal government does not recognize an LLC as a classification when you file your federal taxes, so you must file either as a sole proprietorship, partnership, or corporation.

So What do I do Now?

As with any kind of legal decision, deciding which business entity type is right for your business is a big decision that requires a lot of thought. This is just an overview of the primary differences between each major legal business entity, so before making a decision, check with your lawyer or accountant to decide which is best for your financial and business interests. It seems complicated at first, but once you get registered with the state, you’ll be on your way toward owning and operating your own business!