LLC Protection for Members' Personal Debt in Louisiana
The laws on what creditors are allowed to do vary state by state. This article will look at what type of actions creditors of LLC owners are allowed to take against an LLC in Lousiana. To see the rules about personal creditor’s rights against LLC owners in other states, see Single-Member LLCs and Asset Protection: A 50-State Guide.
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. If the LLC doesn't make any distributions, the creditor gets nothing. In most states, 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. Very frequently, creditors who obtain charging orders end up with nothing.
In many states, a charging order is the exclusive remedy for personal creditors of an LLC owner. The rationale for making a charging order the exclusive remedy is to protect the other LLC owners from having an outside creditor step into the shoes of the debtor member and share in the management and control of the LLC.
Lousiana law states that personal creditors of an LLC owner can obtain a charging order against the LLC. However, unlike many other states, Lousiana LLC law does not state that a charging order is the exclusive remedy. Thus, in addition to obtaining a charging order, creditors could seek other remedies against the LLC debtor, such as foreclosure or possibly even requesting a court to order the LLC dissolved and its assets sold to pay the creditor’s judgment.
This makes Lousiana one of the least attractive states for liability protection for LLC owners against other LLC owner's personal debt. By not expressly making a charging order the exclusive remedy, LLC owners in Lousiana are at risk that personal creditors of LLC members will pursue other remedies, including foreclosure or ordering the dissolution of the LLC.
The reason some states limit the remedies available against an LLC owner to a charging order is to protect members (owners) of an LLC from another member's personal creditors. This rationale 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 allow creditors of SMLLC owners to pursue additional remedies against SMLLC owner debtors even if a charging order is the only remedy allowed for multi-member LLCs. Because personal creditors of LCC owner/debtors in Lousiana are not expressly limited to a charging order, there would be no reason to create a special exception for SMLLC personal creditors.
Under Lousiana law, creditors of a SMLLC are allowed to pursue a charging order. Because the law doesn't state that a charging order is the only remedy available to LLC personal creditors, creditors could pursue other remedies against SMLLC owner debtors including foreclosure or seeking the dissolution of the LLC.
Should You Consider Forming Your LLC in Another State?
You do not have to form your LLC in Lousiana 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 Lousiana, you could form an LLC in Delaware to own and operate it because it has a more favorable LLC law. Doing so will not save you Lousiana taxes because your LLC will have to qualify to do business in Louisiana and pay the same taxes as any other LLC.
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 Lousiana. 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 Lousiana courts will always apply the law of the state where you formed your LLC instead of the less favorable Lousiana LLC law. This is a complex legal issue with no definitive answer. Consult an experienced business lawyer for more information.