LLC: Limited Liability Company
Protecting Assets from Creditors
Charging Orders against LLC’s: A charging order is a court order available to a judgment creditor directed to the LLC of which the debtor is a member. This order essentially grants the creditor the right to whatever distribution would otherwise be due to the debtor member. The creditor cannot participate or influence the LLC and the manager may simply elect to NOT make distributions for whatever period of time. The idea is that the creditor should not be able to interfere with the operations or assets of the company, especially as it could affect members who are not a party to the creditor’s claim.
Resulting Tax liability to creditor: If the creditor obtains a charging order, then the creditor may also be saddled with the liability for taxes on the debtors share of LLC profits, even though such profits may not be actually be distributed.
Charging Order as it relates to Inside and Outside Creditors of a Single Member LLC: An LLC is still effective for asset protection and claims stemming from an inside creditor of a single member LLC. However, based on court rulings in certain states, a client interested in protecting against outside creditors should strongly consider having more than one member in the LLC.