"My spouse and I are the only members of a limited liability company (LLC). We understand that if someone ever sues the LLC, our personal assets are protected from the lawsuit, while our business assets are at risk. But what happens if one of us is sued directly because of something we did outside of the LLC business? For example, let's say one of us is sued because of an automobile accident having nothing to do with our business, and the plaintiff (the person bringing the lawsuit) wins the case. Are the LLC's business assets at risk? What about the assets of the spouse who didn't get sued?"

When people form corporations and LLCs for their business, they tend to think of them as if they were the phaser shield on the Starship Enterprise in the old "Star Trek" science fiction series. People of a certain age will recall that whenever the Enterprise was attacked by the Klingons or some other alien enemy, "Scotty" the engineer pressed a button, and the phaser shield snapped into place to protect the ship (at least until the point where it started to break down under fire and Scotty complained to Captain Kirk, as he did in nearly every episode, that "I cannot keep her going much longer").

A corporation or LLC protects your personal property from attack only if the business is sued. If you are sued personally because of something unrelated to your business, your corporation or LLC won't offer protection from that. If you do not carry personal liability insurance, your personal assets — including your ownership stake in the LLC (called a "membership interest") — will be at risk. Your creditor will be able to grab a piece of your LLC and claim a portion of its profits to satisfy his judgment.

Can your creditor also seize your spouse's assets if the lawsuit is only against you? Most states have done away with the old notion of spouses being "one person" for legal purposes. These days if someone sues you, generally they will not be able to reach assets to which your spouse holds legal title.

What about property that is held in both your name and your spouse's? The short answer is: It all depends on how the law of your state says you own your property. There are three ways a married couple can own property — "tenancy in common," "joint tenancy" and "tenancy by the entirety" — and there are significant differences between them. To learn more, check out the Wikipedia article on "concurrent estate" (http://en.wikipedia.org/wiki/concurrent_estate). Generally, a creditor will be able to reach only that portion of the property that is owned by the spouse who is actually being sued, and in some states, property held by a married couple as "tenants by the entirety" (such as a family residence) may not be reached by the creditor at all.

You will need to hire a lawyer and find out how your state treats jointly owned property. If this is something that will keep you awake at night, and you wish to protect your LLC in the event you are sued, there are three things you can do.

First, if your spouse is not actively involved in the day to day management of the LLC business, consider buying your spouse's LLC membership interest for $1, remove your spouse's name from all government records and public LLC filings, and then transfer legal ownership of all of your assets to your spouse. That way if anyone sues you, you will be "judgment proof" because you don't own any assets. But be careful: If you or your spouse ever separate or divorce, your spouse will get all of your assets. Also, this will not work if either (1) your spouse personally guaranteed your debt or (2) you incurred the debt prior to the date you transferred your assets to your spouse.

Second, consider selling your membership interest to your spouse and becoming a W-2 employee of the LLC. That way you still can participate in the LLC business, but your creditors will not be able to do anything more than perhaps garnish your wages if you are sued.

Third, you can transfer your LLC membership interest and other personally owned assets into a trust for the benefit of your spouse or children, with an "independent trustee" — someone other than you, your spouse or someone who will run off with your spouse.

If none of these options are feasible, have your attorney draw up a "buy sell" agreement between you and your spouse, providing that in the event either of you are sued and a creditor is awarded a piece of your LLC, the creditor must sell the membership interest back to you for a pre-determined price, payable by the LLC over a period of time. If properly drafted, the agreement will "stick" and the creditor will not be able to participate in the LLC business or be entitled to a share of the LLC's future profits.

Cliff Ennico (cennico@legalcareer.com) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.

COPYRIGHT 2008 CLIFFORD R. ENNICO.

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