In New Hampshire, the general rule is that the money or property of a New Hampshire limited liability company (“LLC”) cannot be taken by creditors to pay off the personal debts or liabilities of the LLC’s owners.
Example: John, Burt, and Gina form a New Hampshire LLC to operate their sunflower sales 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 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 New Hampshire.
Charging Order - Exclusive Remedy for Multi-Member LLCs
Effective January 1, 2013, New Hampshire has a new LLC law which governs all LLCs formed after that date. LLCs formed prior to 2013 will not be subject to the new LLC law until January 1, 2014, unless all the LLC members of an existing LLC elect in writing to opt-in to the new law.
The new LLC law provides that a charging order is the sole and exclusive remedy available to personal creditors of an owner of a New Hampshire 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 a charging order 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.
Example: The collection agency obtains a charging order from a New Hampshire court ordering the New Hampshire 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.
New Hampshire’s new LLC law explicitly provides that the charging order is the exclusive legal procedure that personal creditors of New Hampshire LLC members can use to get at an owner’s LLC interest. Under New Hampshire’s prior law, personal creditors of LLC owners were not limited to charging orders and could have pursued other remedies like trying to foreclose on the owner’s LLC financial interest or get a court to order the LLC dissolved and its assets sold. Thus, under the new law, LLC members have better protection against personal creditors of LLC owners.
Special Rule for SMLLCs
The reason personal creditors of LLC owners are limited to a charging order 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, the LLC laws and court decisions in some states have made 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.
New Hampshire is one of the states in a growing trend that make a distinction between the remedies available to creditors of SMLLCs and multi-member LLCs.Under New Hampshire’s new LLC law, personal creditors of SMLLC owners are not limited to the charging order remedy. If the creditor of a SMLLC owner can show that the distributions under a charging order will not satisfy the judgment within a reasonable time, the creditor is not limited to a charging order remedy. Instead, the creditor can take over all the SMLLC owner’s rights—both financial and management—and become the new owner/member of the SMLLC.
If you are concerned about limited liability protection form personal creditors, your LLC should have at least two members. The second member must be 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.