If you own a small business, Ohio's laws provide some protection if a creditor obtains a judgment against you personally. Judgment creditors may be limited in their ability to collect against your business, depending on what type of business you have. Ohio's newly-enacted laws covering limited liability companies (LLCs) offer some of the best asset protection for LLCs in the country, even for single-member LLCs. Read on to learn more.
As a general rule, Ohio law treats business assets as separate from what you own personally. This is because business entities are regarded as a separate legal “person.” There are essentially three types of legal business entities recognized by Ohio:
Which type of business you have, and the size of that business, may determine how much protection is available if a creditor gets a personal judgment against you.
For the purpose of this article, sole proprietorships are not discussed at length. That is because a sole proprietorship is not usually considered to be a distinct legal entity. As a result, a judgment creditor can typically attach business assets of a sole proprietorship to the same extent that it could legally attach any other personal, non-exempt asset that you own. For more information, read Nolo's Sole Proprietorship Basics.
As a general rule, assets owned by a corporation are protected from seizure by a shareholder's judgment creditors. There are limits and exceptions to this protection.
A judgment creditor may be able to attach stock that you own in a corporation. If you are the sole or majority shareholder of your corporation, this presents a problem because the creditor may be able to effectively take over control of the corporation in a way that benefits the creditor. Namely, to vote the shares, liquidate assets of the company and take other action that you could legally do as a sole or majority shareholder.
For more information, read Nolo's Corporation Basics.
For both general partnerships and limited partnerships, Ohio law limits the ways a partner's judgment creditor can execute on the partner's interest in the business. For both entities, a creditor cannot directly grab the assets of the partnership. However, that does not mean a creditor has no remedy against the partnership. Instead, a creditor can satisfy the the partner's debt by using a charging order.
There are limits to a judgment creditor's ability to use a charging order, depending on whether or not you are a partner of a general partnership or limited partnership.
In a general partnership, a judgment creditor can apply to the court for an order charging your partnership interest with the unpaid debt. This is the creditor's exclusive remedy against the partnership. The charging order becomes a lien on your interest in the partnership.
The judgment creditor can then foreclose on your partnership interest. This means that you can be forced to sell your interest in the partnership to satisfy the debt, subject to any exemptions that you can claim against partnership assets.
The judgment creditor can also use the charging order to take any distributions that you would be entitled to receive from the partnership. It can also force the partnership to make distributions, to the extent that you were entitled to make that decision as a partner.
As a partner of a limited partnership, you have more protection if a judgment creditor seeks to charge your interest in that partnership. The creditor cannot foreclose on your interest or exercise any rights that you have as an active partner. Instead, the judgment creditor takes your interest as an assignee. That means that it cannot force the partnership to sell assets or make distributions on your behalf. It will only get what you are entitled to receive when and if assets are actually sold or distributed to you.
Ohio law increased asset protections for an LLC in 2012. Effective May 4, 2012, an LLC has the same protection against creditor attachment as a limited partnership. A judgment creditor's sole and exclusive remedy against the limited liability company is with a charging order. Previously, it could conceivably foreclose on a member's interest, as with a general partnership. Now, the judgment creditor cannot foreclose on your membership interest, force a dissolution of the LLC or take any action as a member. As with a limited partnership, it only has rights as an assignee.
This protection applies equally to single-member LLCs. That means that if you are the sole owner of an LLC, your business is protected from attachment by your creditors as if it were a multi-member LLC, with some conditions.
For more information, read Nolo's LLC Protection For Members' Personal Debt In Ohio.
If you are the sole shareholder of the corporation or sole member of an LLC, it is extremely important that you operate your business consistent with the rules and practices for that business. Follow all formalities, such as holding shareholder and member meetings and keeping adequate business records, and keep business and personal finances separate from each other. If you do not, then a court may decide that your corporation or LLC is simply your alter ego rather than a separate legal entity, and allow the judgment creditor to “pierce the corporate veil.” That means that the corporation or LLC can be liable for your debt and its assets may no longer be protected from attachment. A judgment creditor may also be able to pierce the corporate veil if it can prove that you used your business to hide personal assets to defraud creditors.
For more information, read Nolo's article Personal Liability and Piercing the Corporate Veil.