LLC Protection for Members' Personal Debt in New Hampshire
Last updated: 10/28/2016
This article covers what actions judgment creditors can take against a limited liability company (LLC) for a member’s personal debt under New Hampshire law. State laws on creditor rights against an LLC vary, with some providing more protection from creditors for an LLC and its owners than other states. New Hampshire provides good liability protection for members of multi-member LLCs. However, it provides single-member LLCs (SMLLC) with much less protection from member’s personal creditors than most other states.
General Rule: LLC is Not Liable for Members’ Personal Debts
The general rule in all states, including New Hampshire, is that the money or property of an LLC cannot be taken by creditors to pay off the personal debts or liabilities of the LLC’s owners. Similar to corporations, the money or property held in an LLC belongs to the LLC, not the member/owners individually, and may not be applied by creditors to pay a member’s individual debts. This protection from personal creditors is one of the key reasons people form LLCs. In addition to providing LLC members with personal liability protection from the LLC’s business debts, the LLC also protects the business and its owners from exposure to any debts or personal liability the other LLC members/owners may incur that are unrelated to the LLC’s business.
Charging Order - Exclusive Remedy for Multi-Member LLCs
Like all states, New Hampshire’s LLC law allows creditors of LCC members to obtain a charging order to collect on a judgment obtained against an LLC member. A charging order directs the LLC to pay to the creditor any distributions of income or profit that would otherwise be distributed to the LLC member/debtor. Like most states, creditors with a charging order in New Hampshire only obtain the owner-debtor’s financial rights and cannot participate in the LLC’s management.
To obtain a charging order, the creditor must have a judgment against the LLC member personally. After the judgment is entered, the creditor can apply to the court for a charging order. Since a creditor with a charging order cannot participate in the LLC’s management, it cannot order the LLC to make a distribution or that the LLC be sold to pay off the debt. Frequently, creditors who obtain charging orders against LLCs end up with nothing because they can’t order any distributions and the LLC can choose not to make any.
Although a charging order is often a weak remedy for a creditor, it is not necessarily toothless. The existence of a charging order can make it difficult or impossible for an LLC owner/debtor or the other owners (if any) to take money out of an LLC business without having to pay the judgment creditor first. Moreover, unlike many less creditor-friendly states, New Hampshire also allows a creditor with a charging order to have a court appoint a receiver to oversee the profits or other money due or to become due to the debtor-member. Such a receiver can access the LLC’s financial records to ensure that no money is paid to the debtor-member without the creditor knowing about it. To avoid this, the LLC owner/debtor may seek to pay off or settle the debt.
New Hampshire’s LLC law provides that a charging order is the exclusive remedy available to personal creditors of members of a multi-member LLCs. That is, creditors cannot foreclose upon on such a member’s LLC financial interest or get a court to order a multi-member LLC dissolved and its assets sold. This is in line with practice in a majority of states.
Special Rule for SMLLCs
The reason personal creditors of individual LLC owners are limited to a charging order or foreclosure is to protect the other members (owners) of the LLC. It doesn’t seem fair that they should suffer because a member incurred personal debts that had nothing to do with their LLC. Thus, personal creditors are not permitted to 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 without the other members’ consent. This rationale disappears when the LLC has only one member (owner). As a result, some states' laws make a distinction between multi-member and single-member LLCs (SMLLCs).
New Hampshire is one of the states that make a distinction between the remedies available to creditors of SMLLCs and multi-member LLCs. Under New Hampshire’s LLC law, personal creditors of SMLLC owners are not limited to the charging order remedy. If the creditor of an SMLLC owner can show a court that the distributions under a charging order will not satisfy the judgment within a reasonable time, the court will order that all the SMLLC owner’s rights—both financial and management—be sold in an execution sale. The purchaser of the interest—often the creditor—becomes the new owner of the SMLLC, and the old owner ceases to be a member of the LLC. This is an extremely powerful creditor remedy unavailable in the vast majority of states.
If you are really concerned about protecting the assets in your New Hampshire LLC against personal creditors, you should consider adding another member to your LLC, so it won’t be an SMLLC. If you decide to do this, the second member must be 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 an SMLLC. 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.
Should You Consider Forming Your LLC in Another State?
You do not have to form your LLC in New Hampshire even if it is the state where you live or do business. You can form an LLC in any state—for example, even though your business is in New Hampshire, you could form an LLC in Nevada because it has a more favorable LLC law. Doing so will not save you New Hampshire state taxes because your LLC will have to qualify to do business in New Hampshire and pay the same taxes as any other LLC. Indeed, your costs will increase because you’ll have to pay the fees to form your LLC in the other state plus the fees to register to do business in New Hampshire. However, as a general rule, the formation state’s LLC law will govern your LLC. Thus, forming an LLC in a state with a favorable LLC law could provide you with more limited liability than forming it in New Hampshire.
So should you shop around for the state that provides the most limited liability to LLC owners? If limiting liability is extremely important to you, you may want to form your LLC in a state like Nevada, Delaware, or Wyoming that have very debtor-friendly LLC laws. However, there is no guarantee that New Hampshire or other courts in other states will always apply the law of the state where you formed your LLC, rather than the less favorable New Hampshire 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.