Your Business Credit

Payments made out to your LLC are harder to garnish


As a small-business owner, if you have an LLC it’s best to have clients make checks out to the LLC rather than to you personally. Besides helping separate your personal and business finances, it may help protect you from wage garnishment for past debts

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Dear Your Business Credit,
I am an independent contractor who has a business as an LLC in the state of Florida. I, along with one of my major clients, have received a letter from my county that a judge ordered a wage garnishment against me from a past credit card. My paychecks are not made out to me personally, but to my LLC. Can I still have my wages garnished if I am not an employee? — Jennifer

Dear Jennifer,
Yikes! You must be very worried.

I consulted with Leslie Tayne, an attorney based in Melville, New York, who works with small businesses on issues related to debt and credit. She suggests you talk with an attorney. “This is a complicated situation,” she said in an emailed response to questions. An attorney can guide you on exactly what you’re up against.

When you say your paychecks are made out to your LLC, I assume you do not mean an employee paycheck, but rather that your clients make their payments to your LLC. It is a good thing you asked the client to write checks to your LLC, rather than to you as an individual. Attorneys advise entrepreneurs to do so to maintain the separation an LLC establishes between their personal and business finances. That practice will likely help you in this situation.

Generally, Tayne says, “If checks are being paid out to an LLC rather than an individual person, then that individual’s wages are less likely to be garnished.”

That does not mean the creditor cannot go after pay that arrives in checks written to an LLC. However, the attorney for the creditor has to take an extra step to do that.

“For a creditor to garnish a company’s wages (specifically an LLC), they have to file what is known as a charging lien,” she says. A charging lien is placed by an attorney so he or she can claim a portion of a judgment awarded to a client, in order to get paid.

State laws on garnishment vary. So, when you look for an attorney, Tayne suggests finding one in your area. “Florida has some special exemptions to garnishment, such as a head of household clause that protects head of households from having their wages garnished,” she notes.

More Americans are likely to face your situation as we transition to more of a free agent economy. Freelancers Union estimates that 53 million Americans, making up about one-third of the workforce, now earn money in the freelance economy.

You didn’t mention whether you incurred your credit card debt before becoming an independent contractor or after. Nonetheless, for the sake of other readers who are independent contractors, I’d like to mention something important: Many people fall into debt when they transition to becoming independent contractors or freelancers if they don’t adjust the way they handle their finances.

In the world of independent contracting, even long-term projects can dry up overnight or a client may pay you more slowly than expected. You need cash reserves to survive those bumps — more than you kept on hand when you had a traditional job.

I am a freelancer myself and can’t stress strongly enough how important it is to start building an emergency fund as soon as you can — and to keep adding to it if you already have one. If you auto-deduct $50 a month from your checking account now and put it into savings, you’ll have $600 by the end of the year. That’ll save you from putting unexpected purchases, such as a new set of tires, on your credit card and risking falling behind on that debt if business is slow.

It’s also important for solopreneurs to look at what they’re doing to earn a living as a real business — and not just a stopgap until they find a job.

Why? When you think like a business person, you will make decisions that give you income security, so you don’t fall behind on your bills. I’ve seen many “accidental” freelancers rely too heavily on one source of contract work, only to sink financially when it dried up. Do what 60 percent of solopreneurs do, according to a report by MBO Partners, which studies the freelance economy: Find more than one revenue-generating activity. You may find that once you do that, you’re earning more than you thought and never want to take a traditional job again. And meanwhile, it’ll help you stay out of debt.

See related: How wage garnishment works — and how to avoid it, Shielding business accounts from levy by personal creditors, How to build business credit separate from personal credit

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