LLC Protection for Members' Personal Debt in Indiana
Indiana limited liability law does not provide limited liability companies ("LLCs") with nearly as much protection from member’s personal creditors as do many states. In many states, the rule is that an LLC’s money or property cannot be taken by creditors to pay off the personal debts or liabilities of the LLC’s owners. Instead, creditors are limited to obtaining a charging order against the LLC. 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. Creditors with charging orders 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. In some states, creditors are also allowed to foreclose on the LLC owner/members' debt but, again, these creditors only obtain financial rights--they can't participate in the management of the LLC.
Like other states, Indiana law specifially allows personal creditors of LLC members to obtain a charging order to collect on a judgment against an LLC member/owner. However, unlike many states, creditors of Indiana LLCs are not limited to this method of collecting. Indiana LLC law does not provide that a charging order is the exclusive remedy of members’ personal creditors. Thus, in addition to obtaining a charging order, creditors may be able to foreclose on the debtor-member’s interest. If this occurs, the creditor becomes the permanent owner of all the debtor-member’s financial rights. Moreover, creditors in Indiana could seek to get a court to order the LLC dissolved and its assets sold to pay the creditor’s judgment. Because Indiana does not limit a creditor's rights to a charging order or a charging order and foreclosure, it has some of the least attractive laws for LLC protection from personal creditors.
Be sure to check for updates to Indiana law on this issue. The Indiana legislature has considered adopting a law that would specifically limit the rights of personal creditors of LLC members to a charging order and foreclosure.
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 SMLLC owners to a charging order remedy even if that is the sole remedy provided by law for multi-member LLCs. To date, Indiana law makes no distinction between SMLLCs and multi-member LLCs which means that a creditor of a SMLLC should have the same rights as the creditor of a multi-member LLC. In Indiana, these rights include a charging order, foreclosure, and possibly forcing a dissolution of the LLC. Because there are no co-owners’ interests to protect with a SMLLC, there is even a stronger rationale to allow creditors of a SMLLC these additional remedies against a SMLLC owner.
Should You Consider Forming Your LLC in Another State?
You do not have to form your LLC in Indiana even if it is where you live or do business. You can form an LLC in any state--for example, even though your business is in Indiana, you could form an LLC in Delaware because it has a more favorable LLC law. Doing so will not save you Indiana taxes because your LLC will have to qualify to do business in Indiana and pay the same taxes as any other LLC. However, forming an LLC in a state with a favorable LLC law could provide you with more limited liability than forming it in Indiana.
So, should you shop around for a state that provides the most limited liability to LLC owners? If limiting liability is extremely important to you, you may want to consider forming your LLC someplace other than Indiana. However, there are other factors you should consider as well, such as how much it costs to form an LLC in the other state. Moreover, there is no guarantee that the Indiana courts will apply the law of the state where you formed your LLC instead of the less favorable Indiana LLC law. This is a complex legal issue with no definitive answer. Consult an experienced business lawyer for more information.
For more information on LLCs and the limited liability protections they offer, see Limited Liability Protection and LLCs: A 50-State Guide.