Charging Orders and Single-Member LLCs

All states give personal creditors the right to obtain a charging order against a SMLLC.

A member of a limited liability company (LLC), including the sole member of a single-member limited liability company (SMLLC), may have personal debts for which the LLC is not responsible. For example, an LLC member may rack up $25,000 in charges on a personal credit card for non-business items such as clothes or kitchen appliances, or receive a $50,000 home equity loan from a bank to remodel bedrooms and bathrooms. If the member is unwilling or unable to repay these types of legitimate personal debts, the person or entity that lent the money (the creditor) generally has the option to go to court to force the member (the debtor) to pay.

In all states, personal creditors not only can go after a debtor’s personal assets, such as garnishing wages from paychecks, but also can gain rights relating to a debtor’s LLC memberships. The exact LLC membership rights that a creditor may obtain vary from state to state. However, generally speaking, personal creditors may have up to three options regarding LLC memberships and assets:

  • a charging order
  • foreclosure; and
  • dissolution.

These three options are listed in ascending order of potential control over an LLC member’s interests in the company, with charging orders giving the least control.

Different States, Different Rules

All states allow charging orders. However:

  • about a dozen states limit creditors to charging orders only
  • conversely, roughly a third of the states explicitly allow foreclosure; and
  • statutes in roughly another third of the states are silent on the issue of whether foreclosure is an option.

Both among states that permit only charging orders and those that allow foreclosures, there are a few states where the laws indicate that that these are not the exclusive options available to creditors. Moreover, in the last five years, some states have been revising their laws in this area. And, as a final and very important point, a few states have laws for creditors that relate specifically to SMLLCs.

Note: If you’re particularly concerned about protecting your SMLLC assets, take a close look at your state’s rules for creditors. There should be a section of your state’s LLC act that covers the issue. You can also check Nolo’s online 50-state series on SMLLC asset protection. If you don’t like what you find for your state, you may want to consider forming your SMLLC in another state with more favorable rules.

Charging Orders With a SMLLC

A charging order is a court order relating to money from the LLC that would be paid to a member as a distribution. An LLC member generally earns money from an LLC by receiving distributions of profits. A charging order places a lien on those distributions, making them payable to the creditor rather than to the member.

A charging order, however, only is useful to a creditor if the LLC actually makes distributions. If the LLC does not make distributions to the indebted member, a creditor who has a charging order but no additional orders or rights, will not get any money or assets from the LLC.

All states allow creditors to obtain charging orders for LLC membership interests. In addition, LLC laws in about a dozen states limit creditors to charging orders and explicitly do not permit foreclosures. The most common reason given for limiting creditors in this way is that it would be unfair to other members of a multi-member LLC to be forced to share management and control of their LLC with an outsider/creditor for debts that are unrelated to the LLC or its business. However, this rationale for limiting creditors to charging orders does not carry over to SMLLCs. Because a SMLLC has only one member, no other LLC members (other than the debtor) can be harmed if a creditor is allowed to share in the management or control of the business. With this in mind, and as the number of SMLLCs continues to grow, some state legislatures and courts have made a distinction between creditor’s rights regarding multi-member LLCs and creditor’s rights regarding SMLLCs.

More specifically, two states that otherwise limit creditors to charging orders—Florida and New Hampshire—have statutes that allow creditors to go further when suing owners of SMLLCs. In addition, several other states, including Colorado, Arizona, and Maryland, have court cases that appear to give creditors more rights when dealing with owners of SMLLCs. This is an evolving area of law, and other states, too, may soon have either court cases or statutes that would at least raise questions as to whether creditors have more rights when it comes to owners of SMLLCs.

However, there are also several states—such as Nevada, Wyoming, and South Dakota—that have specifically amended their LLC laws to make it clear that creditors do not have the right to anything more than a charging order for any LLC, including SMLLCs. Consequently, if you are very concerned about protecting your SMLLC assets from personal creditors, you should research the law on this issue in your state. If it’s not that protective for SMLLC owners, you may want to consider forming your SMLLC in another state with more favorable laws.

Additional Information

Other articles in the SMLLC section of this website discuss other aspects of limited liability, including foreclosure and dissolution. For complete information on forming and running SMLLCs, get a copy of Nolo's Guide to Single-Member LLCs: How to Form and Run Your Single-Member Limited Liability Company by David M. Steingold (Nolo).

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