If you are a member of a limited liability company or plan on forming one, you may have questions about creditors’ ability to access the LLC’s assets. The name “limited liability” company implies that liability to creditors is limited in some way by using an LLC as your chosen business entity. But will a creditor ever be able to reach the LLC’s assets or distributions? It depends.
The term “limited liability” when applied to an LLC means that members of the LLC will only have personal liability up to a certain amount for any debts of the limited liability company itself. Often, though, the members have personal debts of their own. When creditors find out that someone is a member of an LLC, they will want to access the member’s distributions to satisfy his or her debts. Under most states’ laws, creditors cannot fully take over a member’s LLC interest. Instead, they have very limited remedies such as obtaining a charging order.
A charging order is a court order stating that the LLC must pay the creditor all the money due to the LLC member from the LLC, such as distributions of income or profits. This is similar to garnishing wages, where a portion of each paycheck is taken to pay a debt: money the LLC would pay to the member, it must pay to the creditor instead. Creditors cannot force LLCs to make distributions, because in most states they cannot participate in LLC management at all.
In most states, including Wyoming and Utah, getting a charging order from the court is a creditor’s only way to access a debtor’s interest in an LLC. In a few states, creditors can foreclose on the member’s LLC ownership interest or have a court order that the LLC be dissolved.
The laws for accessing distributions by single-member LLCs vary from state to state. In response to several court rulings stating that charging order rules do not apply for single-member LLCs, Wyoming has enacted its charging order law with language specifically stating that single-member LLCs have the same protection from creditors as LLCs with multiple members. In other states, there is more uncertainty about creditors’ remedies against an LLC that has only one member.
Need to form a limited liability company? Norris Law Group’s attorneys advise clients on the advantages of business entities such as LLCs. Contact Norris Law Group today by emailing Norris Law Group attorneys, calling (801) 932-1238, or visiting the Utah or Wyoming offices.