The Strength of Nevada’s Liability Protection
Nevada corporations and limited liability companies have arguably the strongest personal liability protection in the country. The reason is that in 2007 Nevada became the only state to limit creditors’ remedies against corporate shares to “charging orders.”
In Nevada, if a creditor tries to seize corporate shares or the membership interest of an LLC, the only thing the credit will get is the right to receive distributions from the company. Distributions that the company may or may not decide to make for sound business reasons. Unlike other states, in Nevada, a creditor which seizes corporate shares does not acquire any shareholder voting rights in the corporation.
This makes it extremely unattractive for creditors to even bother trying to get at the assets of a corporation when attempting to enforce a judgment against the owner of the corporation.
The 2007 Nevada law, which was amended and strengthened in 2009, is set out in Nevada Revised Statutes 78.746. Note, that one of the key requirements to being covered by this statue is for the corporation to have more than one shareholder.
NRS 78.746 Action against stockholder by judgment creditor; limitations.
1. On application to a court of competent jurisdiction by a judgment creditor of a stockholder, the court may charge the stockholder’s stock with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the stockholder’s stock.
2. This section:
(a) Applies only to a corporation that:
(1) Has more than 1 but fewer than 100 stockholders of record at any time.
(2) Is not a subsidiary of a publicly traded corporation, either in whole or in part.
(3) Is not a professional corporation as defined in NRS 89.020.
(b) Does not apply to any liability of a stockholder that exists as the result of an action filed before July 1, 2007.
(c) Provides the exclusive remedy by which a judgment creditor of a stockholder or an assignee of a stockholder may satisfy a judgment out of the stockholder’s stock of the corporation.
(d) Does not deprive any stockholder of the benefit of any exemption applicable to the stockholder’s stock.
(e) Does not supersede any private agreement between a stockholder and a creditor if the private agreement does not conflict with the corporation’s articles of incorporation, bylaws or any shareholder agreement to which the stockholder is a party.
3. As used in this section, “rights of an assignee” means the rights to receive the share of the distributions or dividends paid by the corporation to which the judgment debtor would otherwise be entitled. The term does not include the rights to participate in the management of the business or affairs of the corporation or to become a director of the corporation.
(Added to NRS by 2007, 2639; A 2009, 2829)
Nevada’s statute regarding “charging orders” for limited liability companies is similar. That statute, which is set out in Nevada Revised Statutes 86.401, states:
NRS 86.401 Rights and remedies of creditor of member.
1. On application to a court of competent jurisdiction by a judgment creditor of a member, the court may charge the member’s interest with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the member’s interest.
2. This section:
(a) Provides the exclusive remedy by which a judgment creditor of a member or an assignee of a member may satisfy a judgment out of the member’s interest of the judgment debtor.
(b) Does not deprive any member of the benefit of any exemption applicable to his or her interest.
(Added to NRS by 1991, 1302; A 2001, 1393, 3199; 2003, 20th Special Session, 71)
While arguably, the Nevada limited liability charging statutes applies to both single member and multi-member LLC’s, that particular issue has not been decided by Nevada courts. The safest option is to form an LLC with at least two members.
Other courts, including a bankruptcy appellate court in Colorado, (In re Albright 291 B.R. 538 Bkrtcy.D.Colo.,2003) and the Supreme Court of Florida, (Olmstead v. Fed. Trade Comm’n, 44 So.3d 76, 81, Fla.2010) have held that limitations of charging orders only apply to LLC with at least two owners.
In addition to the special “charging order protections” officers, directors, and stockholders of a Nevada corporation are not individually liable for a debt or liability of the corporation (NRS 78.747 ). Likewise, no members or mangers of any limited liability company in Nevada are individually liable for the debts of the limited liability company (NRS 86.371).
These two statutes are set out below:
NRS 86.371 Liability of member or manager for debts or liabilities of company. Unless otherwise provided in the articles of organization or an agreement signed by the member or manager to be charged, no member or manager of any limited-liability company formed under the laws of this State is individually liable for the debts or liabilities of the company.
(Added to NRS by 1991, 1300; A 1995, 2112)
NRS 78.747 Liability of stockholder, director or officer for debt or liability of corporation.
1. Except as otherwise provided by specific statute, no stockholder, director or officer of a corporation is individually liable for a debt or liability of the corporation, unless the stockholder, director or officer acts as the alter ego of the corporation.
2. A stockholder, director or officer acts as the alter ego of a corporation if:
(a) The corporation is influenced and governed by the stockholder, director or officer;
(b) There is such unity of interest and ownership that the corporation and the stockholder, director or officer are inseparable from each other; and
(c) Adherence to the corporate fiction of a separate entity would sanction fraud or promote a manifest injustice.
3. The question of whether a stockholder, director or officer acts as the alter ego of a corporation must be determined by the court as a matter of law.
(Added to NRS by 2001, 3170)