In South Carolina, like in most states, the general rule is that the money or property of a South Carolina limited liability company (“LLC”) cannot be taken by creditors to pay off the personal debts or liabilities of the LLC’s owners.
Example: John, Lucy, and Me. form a South Carolina LLC to operate their website design 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 South Carolina.
South Carolina, like all states, permits personal creditors of an owner of a South Carolina 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 South Carolina 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 South Carolina 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.
The charging order remedy without any right to order distributions is so weak many creditors don’t even try to use it.
Foreclosure and Dissolution
South Carolina’s LLC law says that the charging order is the only legal procedure that personal creditors of South Carolina LLC members can use to get at an owner’s LLC interest. Thus, unlike some other states, South Carolina does not permit an LLC owner’s personal creditors to foreclose on the owner’s LLC financial interest or get a court to order the LLC dissolved and its assets sold. This makes South Carolina a more friendly state for people who want to form LLCs to protect their assets from personal creditors.
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. South Carolina law makes no distinction with SMLLCs which means that a creditor of a SMLLC should have the same rights as the creditor of a multi-member LLC. In South Carolina, 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.
For more information on LLCs and the limited liability protections they offer, see Limited Liability Protection and LLCs: A 50-State Guide.