A charging order gives a creditor of someone with a membership interest the right to receive distributions on behalf of the member. However, the creditor cannot take the place of the member in the business, nor does he have the right to any of the assets held by the business. His sole right (unless the members agree to something different) would be to receive the distributions on behalf of the member. If the members were to decide NOT to distribute income, then that creditor would receive nothing, and yet would still be responsible for taxes on the undistributed income. The creditors position at this point is that they owe tax on undistributed income, but must wait until the termination of LLC, according to the time set in the members agreement. The creditor would be in the unusual position of paying income tax on income not received, and still owed a judgment by the member. Talk about a unique negotiating position!
Corporate shares on the other hand could be attached by a creditor, and as a shareholder the corporation could be forced to sell assets.
Keep in mind I am not an attorney, so this represents my own non-attorney explanation.
Income from a note held in an LLC is not subject to self-employment taxes.
And yes, this is all covered, plus much more, in Bronchick’s LLC course…a very good course I might add. I highly recommend it.
I am (still) trying to figure the advantages/disadvantages of an LLC vs S-corp.
I am asking myself why would anyone go with an LLC since LLCs have to pay self-employment tax (whopping 15.3%)on ALL profits whereas in an S-corp self-employment tax is paid only on the salary drawn. This could add up to a significant amount I’m sure.
I know the paperwork on an s-corp can be more tedious but for 15%! I’ll do it!
I know Bronchick favors LLC but on the surface I can’t see why.
What you’re missing is that an LLC does NOT pay self-employment tax on rental income…which is what Bronchick typically recommends LLC’s be used for. Further, an LLC has superior asset protection features to that of a corporation (charging order).
If you’re flipping, an LLC would probably not make sense for the reason you mention (unless you elect to be taxed as a corporation).
