Law in the Marketplace: Asset protection – NH vs. Delaware

  • John Cunningham

For the Monitor
Published: 5/14/2022 4:51:28 PM
Modified: 5/14/2022 4:49:40 PM

A major advantage of the New Hampshire LLC Act over the New Hampshire Business Corporation Act is that the former act provides for a unique kind of asset protection provisions called “charging order” protections. The latter act does not.

Section 126 of the New Hampshire LLC Act provides in general that if a creditor obtains a final judgment in court against a debtor who is a member of a New Hampshire LLC, the only remedy available to the creditor with regard to the debtor’s LLC membership will be a court order (called a “charging order”) providing that the LLC must pay the creditor any distributions of LLC profits that would otherwise go to the member. Under Section 126, a creditor cannot obtain a judicial transfer to the creditor of the member’s membership and thus, effectively, a transfer of the member’s LLC assets. No such rule protects New Hampshire shareholders.

In other words, Section 126 provides a major means of asset protection to New Hampshire LLC members that is unavailable to shareholders of New Hampshire corporations. Indeed, because of the availability of this remedy, many New Hampshire corporate shareholders should consider converting their corporations to LLCs.

However, while Section 126 provides that a creditor may not obtain a court order transferring to the creditor the LLC membership of a member of a multi-member LLC, it does not so provide for members of single-member LLCs. On the contrary, the section provides that creditors of members of single-member LLCs may acquire the LLC memberships of single-member LLC members if they can prove in court that the LLC’s distributions of profits to these creditors will not pay off the relevant debts in a reasonable period of time.

However, the charging order protections of the Delaware Limited Liability Company Act are very different: Those provisions provide that while creditors of members of Delaware LLCs can obtain charging orders against the members of either multi-member or single-member LLCs, they cannot obtain court orders transferring to the creditors the memberships of either type of LLC.

This raises interesting questions for New Hampshire business owners who want not only to hold their assets in a single-member LLC rather than in a multi-member LLC, but also to maximize their protection of these assets.

1. Should these business owners form their LLCs as Delaware LLCs rather than as New Hampshire LLC; or

1.If they already own New Hampshire single-member LLCs, should they “domesticate” them (i.e., convert them) to Delaware single-member LLCs, as permitted by both New Hampshire and Delaware law?

The problem with these options is non-obvious but important — namely, that although in a Delaware court, these New Hampshire business owners will certainly win any charging order case, in a New Hampshire court, they may not. This is because, while the matter is unclear, a New Hampshire court may well declare that under New Hampshire public policy, Delaware charging order law is invalid.

So, what should these NH business owners do? They have two options.

1. The first is that, if they can possibly find a person who will be an acceptable co-member, they should admit that person as the second member of their LLC. This way, as long as the new member holds a bona fide membership, these owners will obtain full New Hampshire charging order protections.

2. The second is to hold their assets in a Delaware single-member LLC and, if they get sued in New Hampshire, to hope for the best.

If they choose the second option, they will at least have the comfort of knowing that any creditor suit against them in a New Hampshire court will be complex; that the suit will thus cost the creditor substantial legal fees; and thus, that the creditor’s suit may not be worth the financial risk.

John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or lawjmc@comcast.net. His website is llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.


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