If one of your llc members has a government lien against them,
Can the government come after the llc’s profits ?
Yes, unless you have a very well drafted operating agreement.
BLL, Could you explain ?
Any creditor of a member can get a charging order. That means the LLC pays the creditor instead of the member until the debt is paid. In that case, the LLC members decide to distribute nothing and hope the creditor will just go away since there is no money. You will hear stories that the creditor has to pay the taxes on LLC profit whether or not a distribution is actually made, which forces the creditor to go away or settle for less. That is incorrect, the debtor pays the taxes as long as the creditor holds merely a charging order. The case cited to justify shifting the tax burden involves a creditor who had dominion and control over the membership interest. That is not the typical case.
The simplest way to deal with a charging order is to make no distributions. However, if you used an online LLC firm or a cheap/free cookie-cutter agreement, then there is probably language that requires the LLC to make a distribution. As a debtor, you don’t want the LLC to distribute profit because you won’t get the money, but the operating agreement requires it and that makes charging order protection useless. Instead of a charging order, the creditor can also foreclose on your membership interest and take your place as an LLC member. This is quite possible if the operating agreement doesn’t require material contributions from the members. The online and low cost agreements lack the necessary language to defeat a foreclosure.
On the other hand, a well drafted operating agreement will strip a member of his rights until the charging order is removed and has language that prevents a foreclosure of a debtor member’s interest.
Thanks BLL