LLC Protection for Members' Personal Debt in Georgia
In Georgia, like in most states, the general rule is that the money or property of a Georgia limited liability company (“LLC”) cannot be taken by creditors to pay off the personal debts or liabilities of the LLC’s owners.
Example: John, Arnie, and Jean form a Georgia LLC to operate their peach processing business. John, a big spender, owes $38,000 on his personal credit cards. When he doesn’t pay, the accounts are turned over to a collection agency which obtains a $38,000 court judgment against him. While the collection agency can attempt to collect on the debt from John’s personal assets, it cannot take money or property owned by the LLC. For example, it cannot get any of the money held in the LLC’s bank account.
Even though creditors can’t collect directly from an LLC for an owner’s personal debts, there are other ways creditors might try to go after the LLC for the owner’s personal debt. These include:
1) obtaining a charging order requiring that the LLC pay the creditor all the money distributed to the debtor-owner
2) foreclosing on the debtor-owner’s LLC ownership interest, or
3) getting a court to order the LLC to be dissolved and all its assets sold.
The laws on what creditors are allowed to do varies state by state. This article will look at what type of actions creditors of LLC owners are allowed to take against an LLC in Georgia.
Georgia, like all states, permits personal creditors of an owner of a Georgia LLC to obtain a charging order against the debtor-owner’s membership interest. A charging order is an order issued by a court directing an LLC’s manager to pay to the debtor-owner’s personal creditor any distributions of income or profits that would otherwise be distributed to the debtor-member. Like most states, creditors with a charging order in Georgia only obtain the owner-debtor’s “financial rights” and cannot participate in the management of the LLC. Thus, the creditor cannot order the LLC to make a distribution subject to its charging order. Very frequently, creditors who obtain charging orders end up with nothing because they can’t order any distributions. Thus, they are not a very effective collection tool for creditors.
Example: The collection agency obtains a charging order from a Georgia court ordering the website design LLC to pay to it any distributions of money or property the LLC would ordinarily make to John until the entire $38,000 judgment is paid. However, if there are no distributions, there will be no payments.
Foreclosure and Dissolution Allowed Only If Authorized in Articles or Operating Agreement
Georgia’s LLC law says that, unless the operating agreement provides otherwise, a Georgia LLC owner’s personal creditors cannot foreclose on the owner’s LLC financial interest or get a court to order the LLC dissolved and its assets sold. If you want the best limited liability protection, your LLC operating agreement should not authorize any type of collection procedures be allowed against the LLC.
The reason many states limit the remedies available to personal creditors of individual LLC owners is to protect the other members (owners) of the LLC. With a charging order, personal creditors can't take over the debtor-member’s LLC interest and join in the management of the LLC or have the LLC dissolved and its assets sold.
The rationale of protecting other LLC members disappears when the LLC has only one member (owner). As a result, the LLC laws and court decisions in some states make a distinction between multi-member and single-member LLCs ("SMLLCs") and don't limit personal creditors of owners of SMLLCs to the same remedies as multi-member LLCs. It's possible that could happen in Georgia although to date Georgia's LLC laws make no distinction between multi-member and single-member LLCs. Thus it appears that creditors of Georgia SMLLC owners are limited to the same remedies as those described above for multi-member LLCs.
It is possible that in some cases the laws of another state would be applied to a Georgia LLC--for example, where a Georgia LLC does business or owns property in another state. In addition, the protection that LLC state laws provide to SMLLCs may be ignored by the federal bankruptcy courts if the SMLLC owner files for bankruptcy.
If you are concerned about your LLC's liability protection from personal creditors, you should consider adding one or more members to your LLC. If you add a spouse or relative as a member, make sure that person is treated as a legitimate co-owner of the LLC. If the second owner is added merely on paper as a sham, the courts will likely treat the LLC as a single-member LLC. To avoid this, the co-owner must pay fair market value for the interest acquired and otherwise be treated as a "real" LLC member--that is, receive financial statements, participate in decision making, and receive a share of the LLC profits equal to the membership percentage owned.
For more information on LLCs and the limited liability protections they offer, see Limited Liability Protection and LLCs: A 50-State Guide.