District of Columbia (Washington D.C.) law does not provide limited liability companies (“LLCs”) with as much protection from member’s personal creditors as do many states. In many states, the general 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 of LLC owners are limited to obtaining a charging order against the LLC. 

Washington D.C.'s Weak LLC Liability Protection

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. But if there are no distributions, the creditor gets nothing. In most states, 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. Very frequently, creditors who obtain charging orders end up with nothing. 

Like all 50 states, the District of Columbia allows creditors of LLC members to obtain a charging order to collect on a judgment obtained against an LLC member. However, creditors are not limited to this method of collecting. Washington D.C. law does not provide that a charging order is the exclusive remedy of LLC members’ personal creditors. Thus, in addition to obtaining a charging order, creditors may be able to foreclose on a member’s interest. If this occurs, the creditor becomes the permanent owner of all the debtor-member’s financial rights, including the right to receive money from the LLC. Moreover, the creditor might even be able get a court to order the LLC dissolved and its assets sold to pay the creditor’s judgment.

This makes the District of Columbia one of the least attractive places in which to form an LLC as far as protection from personal creditors goes. 

Should You Consider Forming Your LLC in Another State?

You do not have to form your LLC in District of Columbia 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 the District of Columbia, you could form your LLC in Delaware, which has a more favorable LLC law. Doing so will not save you District of Columbia taxes because your LLC will have to qualify to do business in the District and pay the same taxes as any other LLC there. However, 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 your home state.

So, should you shop around for a state that provides the most limited liability to LLC owners? if your main interest in forming and maintaining an LLC is not running a business, but protection of an asset within the LLC, you may want to form your LLC someplace other than the District of Columbia. 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 District of Columbia courts will always apply the law of the state where you formed your LLC instead of less favorable local 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.