LLC Protection for Members' Personal Debt in Nevada

When you own a limited liability company (LLC), you have a personal property interest in your ownership share of the LLC. And when you have personal debt, creditors can generally go after your personal property and assets to recover the debt (with some exceptions). Many states have laws about when and how creditors can collect a debt through your LLC interest.

Nevada is one of the more debtor-friendly states. Under Nevada's LLC laws, LLCs and their owners enjoy more protection from creditors than LLCs and owners do in other states.

General Rule: LLC Isn't Liable for Members' Personal Debts

The general rule in all states, including Nevada, is that creditors can't take the money or property of an LLC to pay off the personal debts or liabilities of the LLC's owners (called "members"). An LLC is legally treated as a separate entity from its owners—much like a corporation is treated as a separate entity from its shareholders. This legal separation is what makes an LLC such an attractive business structure to form.

Accordingly, any money in the LLC's bank account or any property under the LLC's name is company property alone. LLC members don't have any ownership rights to that property. Instead, the members have ownership rights to the LLC itself, typically in proportion to their ownership share.

On the other side, LLC members are protected from the LLC's debts. LLC members have personal liability protection from the company's business debts, meaning that the LLC's creditors can't usually come after the members to pay a company debt. In addition, LLC members—and the LLC itself—are protected from other member's personal debts that are unrelated to the LLC's business.

General Protections of Nevada LLC Members

When you personally owe a debt, a creditor can go to court and get a court judgment against you. When you have a judgment against you, the court will order you to pay the debt. A creditor with a judgment is called a "judgment creditor."

When you're an LLC member with personal debt, you should generally consider three actions that a judgment creditor can potentially take against you:

• The judgment creditor gets a court to order the LLC to pay the creditor any LLC distributions meant for you (called a "charging order").
• The judgment creditor takes over your financial rights and interest in the LLC (thus "foreclosing" on your LLC interest), meaning they have full rights in your LLC distributions and in your share of the LLC's assets if the LLC dissolves.
• The judgment creditor forces the LLC to dissolve and collects the judgment from the LLC's assets.

In Nevada, a judgment creditor can take only the first action but not the other two actions. In other words, a judgment creditor can obtain a charging order against your Nevada LLC but can't foreclose on your LLC interest or cause your LLC to dissolve.

Nevada LLCs and Charging Orders—Exclusive Remedy

In Nevada, a personal creditor's sole and exclusive remedy against an indebted LLC member is a charging order. In other words, a charging order is the only legal procedure that personal creditors of a Nevada LLC member can use to get at an indebted LLC member's ownership interest. (Nev. Rev. Stat. § 86.401 (2024).)

A charging order directs the LLC to pay to the creditor any distributions of income or profit that would otherwise be distributed to the indebted LLC member. In Nevada, like in most states, creditors with a charging order only obtain the indebted LLC member's financial rights. Creditors can't participate in the management of the LLC or the affairs of the business. (Nev. Rev. Stat. §§ 86.351 and 86.401 (2024).)

Because a creditor with a charging order can't participate in the LLC's management, it can't order the LLC to:

• make a distribution, or
• be dissolved and the assets sold to pay off the debt.

As a result, personal creditors who obtain charging orders against LLCs often end up with nothing because they can't order any distributions and the LLC can choose not to make any.

Although a charging order is often a weak remedy for a creditor, it's not necessarily ineffective. The existence of a charging order can make it difficult or impossible for an indebted LLC member or the other owners (if any) to take money from the LLC without first paying the judgment creditor. In other words, if there's a charging order against the LLC and an LLC member wants to take a distribution without also paying the judgment creditor, the indebted member must first pay off or settle the debt.

For example, suppose Deloris, Mary, and Vince form a Nevada LLC to run their restaurant. Their restaurant is successful but Vince's spending problem lands him in hot water with his credit card company. Within a few months, Vince racks up $20,000 on his personal credit cards. When he doesn't pay the charges, his accounts are turned over to a debt collection agency. The agency goes to court and obtains a $20,000 judgment against Vince, and the agency becomes a judgment creditor.

Vince doesn't have many assets so the collection agency asks the court to enter a charging order against Vince's LLC interest to recover the debt. With the charging order, the LLC must pay the collection agency any LLC distributions that would otherwise go to Vince to pay the judgment with interest.

Foreclosure and Dissolution Not Allowed

Nevada's LLC law specifically says that a charging order is the only remedy available to a judgment creditor to satisfy a personal debt out of a member's LLC interest. This explicit statement of law makes Nevada one of the more friendlier states for people who want to protect their LLC interest from personal creditors.

Nevada's LLC explicitly forbids judgment creditors from using other remedies to recover personal debt out of a member's LLC interest, including:

• foreclosure on the member's interest, and
• a court order for directions, accounts, and inquiries.

In addition, judgment creditors can't have a court order the LLC to be dissolved and its assets sold to pay the judgment.

What About Single-Member Nevada LLCs?

Some states, like Florida, distinguish between multi-member and single-member LLCs (SMLLCs) in their laws related to LLC member protections against personal creditors. Oftentimes, the states that make a distinction between the two kinds of LLCs give less protection to sole members of SMLLCs than to members of multi-member LLCs.

Typically, states want to limit personal creditors of LLC owners to a charging order to protect the other LLC members from personal debts that are unrelated to the LLC and its business. If a judgment creditor isn't limited to only a charging order, LLC members could be forced into sharing management and control of the LLC with a member's personal creditor. Charging orders avoid this outcome by giving creditors the right to distributions only. With an SMLLC, there are no other members to protect so the rationale for limiting creditors to a charging order disappears.

How Nevada Law Treats Multi-Member vs. Single-Member LLCs

While some states distinguish between multi-member and single-member LLCs, Nevada doesn't. Nevada isn't one of the states that have decided to broaden creditors' rights against SMLLCs. Instead, Nevada's LLC laws explicitly say that the charging order protection provided to LLCs applies to both SMLLCs and multi-member LLCs. (Nev. Rev. Stat. § 86.401 (2024).)

As a result, Nevada is one of the most friendly states for those who want to protect their assets by forming an LLC or SMLLC.

If you form an LLC in Nevada, you can expect Nevada law to generally apply to your business. However, there could be circumstances where this isn't the case. For instance, another state's laws could apply if your LLC has property or does business in that state. And, that other state could be less debtor-friendly, particularly for SMLLCs.

Consider Forming or Converting to a Multi-Member LLC

Nevada's laws are very friendly to SMLLCs concerning protecting a member's LLC interest. However, it's sometimes a good idea to try to increase your legal protections by adding a member to your LLC to become a multi-member LLC if doing so makes sense for your particular situation.

For example, owning a multi-member LLC instead of an SMLLC could give you more protection if:

• you file for bankruptcy, or
• your LLC is judged by the LLC laws of another state that provide less protection to SMLLCs.

If you add a second member to your LLC, you must treat them as a legitimate co-owner of the business. If the second owner is added merely on paper as a sham, the courts will likely treat the LLC as an SMLLC.

A legitimate co-owner of a business, for example, usually:

• pays a fair market value for the LLC interest they acquire
• receives financial statements
• participates in some level of decision-making, and
• receives a share of the LLC profits equal to the membership percentage owned.

If you'd like to add another member to your LLC but don't want that member to have control over the company's daily operations, you can limit that second member's role in the company. Specifically, you can set up a manager-managed LLC and name yourself as the sole manager. In this case, you—as the manager of the LLC—would make the operational decisions for the LLC and actively participate in the business's affairs. The second non-manager member would take a passive role in the company and wouldn't get directly involved in the running of the business.

You can lay out these manager and member roles in the LLC's operating agreement. If you'd like help drafting this agreement or evaluating the need for a second member, you should talk to a Nevada business attorney.

Should You Form Your LLC in Another State?

You don't have to form your LLC in Nevada even if it's the state where you live or do business. You can form an LLC in any state. However, LLC owners might prefer Nevada's LLC creditor protection laws over those of other states.

Keep in mind that if you do decide to create your LLC outside Nevada, you won't save on Nevada taxes. Your LLC will still need to qualify to do business in Nevada and pay the same taxes as any other LLC. As a result, your costs will increase because you'll have to pay both the fees:

• to form your LLC in the other state, and
• to register to do business in Nevada.

As mentioned previously, the formation state's LLC law will generally govern your LLC. When choosing a state to create your LLC, consider choosing one with favorable LLC laws that can provide you with more limited liability protections. You might decide that Nevada is the best fit for your business due to its debtor-friendly laws and low taxes.

More Information on Nevada LLCs and Liability Protection

As a Nevada LLC owner, you'll need to be aware and up to date on your legal obligations, including your LLC's ongoing legal requirements. For more tips and guidance on keeping up with your LLC's maintenance fees and filings, check out our article on LLC annual report and tax filing requirements in Nevada.

You should also take a look our section on LLCs and asset protection. This section has articles on strategies to strengthen your LLC's asset protection and when you might be personally liable for LLC debts.

If you want additional legal guidance or have questions specific to your situation, talk to a Nevada business lawyer. An experienced attorney can answer your legal questions, develop a plan to protect your business, and negotiate with your creditors.