Protecting The Owners and Stock In A Closely Held Corporation

by Bruce Givner on January 17, 2012

Operating a business in a closely held corporation can be an excellent way to protect the owner from problems with the business.  If the business is adequately capitalized, then someone suing the business may not be able to “pierce the corporate veil” and get to the personal assets of the owner.

However, what if the owner is sued as an individual?  For example, what if the owner gets into a car crash and the damages exceed the owner’s auto insurance and umbrella policy?  The judgment creditor may seize the owner’s stock in the closely held corporation.  How do we protect the owner from such a problem that might occur in the future?  (We don’t want to protect the owner from that type of problem if it is a current problem because that would be a fraudulent transfer.)

One approach is to have the closely held corporation formed (or moved to) Nevada.  Nevada law limits the remedy of a judgment creditor to a “charging order.”  That means that the judgement creditor can only get distributions made to the shareholder as a dividend.  Another remedy is to have the owner transfer the stock to an LLC in Nevada.  That is because Nevada limits a judgment creditor to a charging order remedy.  However, transfer to a California LLC can also be helpful if there is at least one other member and the operating agreement has been carefully drafted in light of Corporations Code §17302(c)(2).

For asset protection, entity formation and protecting the owners of a closely held corporation, contact us Givner & Kaye, APC. (310) 207-8008

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