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Child Support Affecting My LLC License?

Updated on
March 17, 2021
Article written by
Attorney Kevin O'Flaherty

This article will discuss what kind of impact child support can have on an individual's LLC license. We will answer the following questions:

 

  • How does child support work?
  • How does an LLC work?
  • How is an LLC operated?
  • Does child support put my LLC at risk?

 

If you're a business owner or professional that requires a license, you may be wondering if failing to pay child support can negatively impact your work. You've probably heard that past-due child support payments can be garnished from an individual's income, but can it extend to an LLC bank account? Does the LLC provide any protection from child support actions? Unfortunately, for the individual who owes child support, there is a good chance that failing to pay may jeopardize their professional life and business.

 

How Does Child Support Work?

 

The law requires biological parents to support their children regardless of the marriage status of the parents. Child support costs include health care, schooling, extra-curricular activities, and daycare expenses. As the child ages, the court can order child support be paid for college, transportation expenses, and room and board. The parent making child support payments must do so until one of the following conditions is met:

 

  • The child ages to an adult (parents may still have to pay non-minor child support)
  • The child enlists in the military and goes on active duty
  • The court emancipates the child
  • The child is adopted, or you lose parental rights

 

The amount of child support owed is based largely on each parent's income and how much time the child spends with each parent. When calculating child support, it's essential to include any relevant costs and factors to arrive at an equitable number for both parties.

 

What Is An LLC?

 

A limited liability company, or LLC, acts like a "hybrid" business structure. It takes the best of corporations, such as pass-through taxes and limited liability for business debts, and marries them with simplicity and accessibility of a sole-proprietorship. LLCs protect business owners and their families by placing a limited liability wall between their personal assets and business assets, meaning business creditors can't reach what is not part of the business. LLCs also offer a lot of flexibility for your company's organizational structure and are not subject to the restrictions and regulations adherent in S and C Corporations. For the owners of an LLC, profit and loss are reported on their individual tax returns.

 

Some states, including Illinois, allow business owners to form single-member LLCs, an excellent option for those who want more protection than what exists under a sole-proprietorship. However, LLCs don't protect any debts personally guaranteed by the owner. Any funds pulled from the business and placed into a personal account are fair game to creditors and collection actions.

 

How Is An LLC Operated?

 

Forming an LLC requires a decent amount of work on the front-end, which you can learn about here, but completing your due diligence decreases the risk of legal headaches later on. 

 

Creating an LLC requires obtaining an employee identification number from the IRS. All business should be conducted using the EIN, and all contracts and invoices must be in the LLC's name. If you form a single-member LLC, you must sign all documentation as the president or managing member. Failing to follow the rules of an LLC, whether single-member or otherwise, can render the protection of the LLC void and accessible to child support services.

 

Mixing business assets with personal assets or failing to maintain LLC insurance can also jeopardize the LLC's protection and enable child support services to access your business's bank account.

 

Does Child Support Put My LLC At Risk?

 

Generally, no. Having a court order to pay child support as part of a divorce or any other reason doesn't pose an immediate risk to your LLC. Furthermore, because an LLC separates your personal assets from your business assets, child support services can't legally garnish funds from the business bank account. However, plenty of scenarios could void the company's liability protection and put the LLC and its funds at risk. Some examples include:

 

  • Failure to operate under the correct EIN
  • Failure to correctly sign all documentation
  • Failure to operate within the LLC guidelines established in your state
  • Mixing business funds with personal assets
  • Failure to maintain proper insurance and licensure

 

All of the above examples can jeopardize the LLC's liability protection and put the company's assets at risk.

 

It would seem that, as long as the business is run properly, an LLC insulates any associated bank account or asset from child support actions; this assumption is false. While it's probably safe to assume that money in an LLC bank account is secure, as soon as that money is drawn, it is no longer protected, even if you're the owner. Part of the reason for this discrepancy is that the LLC is considered an employer. The money you pay yourself and the employees will be classified as a salary, bonus, commission, dividend, etc. According to most states child support guidelines, gross income can be garnished. Examples of gross income include, but are not limited too:

 

  • Wages
  • Salaries
  • Commissions
  • Bonuses
  • Pensions
  • Interest
  • Annuities
  • Dividends
  • Capital gains
  • Unemployment insurance
  • Prizes

 

Furthermore, a parent or child support agency could sue the owner of an LLC, alleging that the assets are owned by the defendant and should be available to pay for child support. While a claim such as this will probably fail due to the protections afforded by an LLC, specifics of the case may determine otherwise. 

 

Another complication that could arise from failing to pay child support is the suspension or revoking of your professional license. If you run a business that requires an active license to secure and correctly operate the LLC, failing to meet your child support obligations could lead to termination of the LLC's liability protection.


Child Support Affecting My LLC License?
Author

Attorney Kevin O'Flaherty

Kevin O’Flaherty is a graduate of the University of Iowa and Chicago-Kent College of Law. He has experience in litigation, estate planning, bankruptcy, real estate, and comprehensive business representation.

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