LLC Protection for Members' Personal Debt in Wyoming

In Wyoming, the general rule is that the money or property of a Wyoming limited liability company (“LLC”) cannot be taken by creditors to pay off the personal debts or liabilities of the LLC’s owners.

Example: John, Vic, and Lonnie form a Wyoming LLC to operate their cattle 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 Wyoming.

Charging Order

Wyoming permits personal creditors of an owner of a Wyoming 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 Wyoming 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 Wyoming court ordering the Wyoming 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.

Wyoming’s LLC law says that the charging order is the only legal procedure that personal creditors of Wyoming LLC members can use to get at an owner’s LLC interest. Thus, unlike some other states, Wyoming 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 Wyoming one of the most friendly states for people who want to form LLCs to protect their assets from personal creditors.

Single Member Wyoming LLCs are Protected Too

The main reason personal creditors of individual LLC owners have been limited to a charging order is to protect the other members (owners) of the LLC from having an outside creditor step in and have management rights in the LLC. With a single- member LLC ("SMLLC"), this rationale disappears because there are no other members to protect. In some states, the personal creditors of owners of SMLLCs are free to exercise other remedies, including foreclosing on the debtor-owner's interest and, in some states, they can have the LLC dissolved and its assets sold.

Wyoming is not one of these states. To avoid any uncertainty in this area, Wyoming recently amended its LLC laws to make clear that a SMLLC is entitled to the same charging order protection as a multi-member LLC and no other remedies are available to SMLLC creditors. This makes Wyoming one of the most friendly states for LLC owners interested in asset protection.

However, just because you form your SMLLC in Wyoming doesn't necessarily mean that Wyoming’s LLC law will always apply to it. It's possible that in some cases the LLC laws of other, less debtor- friendly, states would apply--for example, where a Wyoming LLC does business or owns property in another state. In addition, the protections Wyoming and other state LLC laws provide to SMLLCs may be ignored by the federal bankruptcy courts if the SMLLC owner files for bankruptcy.

To avoid possible liability problems with a SMLLC, you could add at least one other member to your LLC. While the second owner can be a spouse or relative, that person must be a 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 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.

Finally, your LLC will not provide you with any liability protection for a debt or other liability you incurred before you formed your LLC.

October 2012