Charging Order

With respect to outside claims or claims against the individual themselves, it is important to understand the benefits of Charging Order protected entities such as LLCs and Limited Partnerships.  If a creditor has a judgment against the owner/member of an LLC, the creditor’s remedy is to obtain a Charging Order against the debtor member’s interest in the LLC.  A Charging Order is a like a garnishment of wages in that it attaches to the economic right of the debtor member to receive distributions from the LLC.  Once the creditor has a Charging Order in place, then any distribution to the debtor member must be paid to the creditor.  The benefit to the debtor member of the LLC is twofold:

1.    It limits the creditor from attacking the actual assets of the LLC; and,
2.    The creditor has to wait until distributions are actually made from the LLC before its judgment is satisfied.

In a properly drafted Operating Agreement of the LLC, the manager will have the complete discretion to withhold making distributions.  Therefore, the creditor remedy of the Charging Order is effectively rendered toothless.  

The problem is that in many states the law or the courts allow the creditor much more leeway with respect to enforcing creditor’s remedies.  Accordingly, it is important that the business owner or professional utilize an LLC from a state jurisdiction that has a more beneficial Charging Order law.  Nevada, Wyoming, Delaware and Arizona are such jurisdictions.