I am frequently asked about the impact of a husband and wife owning the membership interest in an LLC in a community property state.  It is and interesting issue that is unresolved in many respects.

I have written a great deal about the advantages of incorporation over the years.   A corporation creates a separate legal entity whose assets and liabilities are separate from any individual - it can be an effective asset protection tool to separate the risks of business from our personal assets.  However, I recently discovered a fascinating new corporate benefit.

I don't know how I missed this one, but I'm glad I finally ran across it:  the international law firm of Fulbright & Jaworski L.L.P. (whose company slogan is "When you think litigation insight, think Fulbright), released their second annual Litigation Trends Survey last October.  It is a fascinating, 32-page glimpse at the impact of runaway litigation on the economy.  Here are some interesting facts from their findings:

The law firm of Riser Askisson, LLP published several years ago an authoritative article on the truth about the taxation of charging orders held by judgment creditors.  The article, titled Tax Consequences of Charging Orders:  Is the K.O. by the K-1 K.O.'d by the Code?, originally appeared in the Winter 1999 edition of the Asset Protection Journal.  The author, Christopher M. Riser, J.D., LL.M., refutes a commonly-held notion that creditors who obtain a charging order against the ownership interest of a debtor's LLC or limited partnership are also responsible for the tax liabilities of that interest.  The popular theory debunked in this article goes on to imply that since the tax liability flows to the creditor, and the creditor has no control over whether or not profits are actually distributed, then the creditor will have to pay the taxes associated with charging order out of pocket.

An example of this theory being promoted can be found here.   Note the last sentence of the second paragraph.  (That is, until they change it when they realize that they are getting traffic from this post.)

Link: Teed-off golfer who lost teeth to errant ball bites back.  Points out the need for asset protection planning:  you never know when lightning is going to strike!
- Derek Rowley