One of the less-than-pleasant aspects of losing a court decision is the issue of garnishment. This legal authority forcibly allows a creditor to separate you from your funds either in a bank account or earned on a paycheck. However, the issue gets a bit complicated when it involves funds that are within a limited liability corporation business bank account rather than a private bank account.
LLC Defined
A limited liability corporation (LLC) is a legal business status that and structure approved and overseen by a state regulatory agency. For example, in some states the secretary of state will have statutory authority to approve or decertify an LLC. The major protection of an LLC is that it limits the liability of the business's owners from losing their own assets if the business is sued. There isn't a maximum number of owners allowed, and LLCs can also consist of just one owner, making the business structure allowable for sole proprietorships (one-person businesses).
Garnishment
As noted, garnishment is a legally approved seizure by a party owed money to take those funds from another. This usually happens when a court case is won by a creditor on a debtor. It can also happen in a civil lawsuit when a party wins a judgment against another.
Garnishment can seize money in bank accounts and it can tap into a percentage of funds earned in payroll with individuals before the person gets his net paycheck.
Why Garnishment Is Already Difficult to Effect
Many times, with an individual, the bank accounts owned are frozen by the court to protect the funds that exist pending a decision. Once the decision goes in favor of the creditor, the debtor doesn't really have any enthusiasm to help the creditor execute the garnishment with the bank account. It can become a very hostile relationship. The debtor has to pursue the funds, many times having to legally convince institutions to hand over the target accounts.
LLC Protections and Garnishment
An LLC's bank accounts for its business purposes are generally off-limits from a personal garnishment for an individual. Regardless of whether the individual is a primary owner or sole owner, the bank accounts are part of the business entity, not the individual. Thus, for a personal garnishment to have reached over to the business side, the lawsuit or court action would have needed to include the LLC business as a legal target as well.
How LLC Accounts Can Be Garnished
The lawyers involved must prove that the LLC business account is in fact being used for personal purposes, to hide personal funds and/or was just created in the midst of the garnishment proceedings to hide personal funds. If the court can be convinced this was the case the related bank accounts can be garnished as well. Also, if it can be shown that all the income to the LLC ends up in a person's personal account, then the protection of an LLC will be considered moot by the court and garnishment can occur.
Garnishment Laws Are State-Specific
Garnishments don't travel across state borders as a legal authority. So, if there is a personal garnishment in one state and the LLC is established in a second state, the party seeking the funds will have to get the second state's court to recognize the action. This is called "domesticating" the judgment. Nothing can be acted on until the court in the second state approves acceptance of the judgment.
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