Sometimes debt and business go hand in hand. No matter how well a business is run, there is always the chance that a debt may appear that can put a damper on things. When people are faced with debt, sometimes they are given a charging order by a creditor. It’s best to learn more about charging orders and what can be done with them with the following information.
A charge order is simply a court issued order that tells the manager of an LLC that they must provide payment to the creditor of whoever owns a debt, which includes profits and income distributions which would otherwise be given to the one who is in debt. Creditors can get these orders issued in any state, which the majority of states having charging orders as the only option available for collecting debt from an LLC owner. This is a benefit to LLC owners, because if the LLC were actually a corporation, the creditor would try to take ownership of any shares owned by the owner, which could result in liquidated asses if the creditor were able to obtain 51% of the corporation’s shares.
Taking over management duties of an LLC isn’t possible in most states with a charging order, meaning that a distribution won’t be counted in the order, which often results in the creditor getting nothing for their trouble. That doesn’t mean that the order can’t really amount to anything. The LLC owner who is in debt, along with any other owners will have a hard time taking money out of the LLC, and in some cases won’t be able to do it at all. The creditor will need payment before this can happen.
For the third of states that don’t restrict to only a charging order, more drastic measures can be taken by a creditor. If the charging order isn’t paid, the creditor can have an order placed for the foreclosure of the LLC. In this case, all of the financial rights of the person in debt will be given to the creditor permanently, along with received LLC money. This does not include management rights, so the LLC can’t be forced to pay money by the creditor. Usually before such a step is taken, the LLC member in debt will attempt to settle with the creditor.
The other option that creditors will take in some states when the charging order isn’t paid is dissolution. This means that the order would force the LLC to stop doing business altogether and sell off any assets that it may have. This is an extreme case measure that isn’t as likely to happen as the other options, but it can still occur, and when it does, it’s spells the end of the LLC.
In cases with single owner LLCs, there is no co-owner who would be protected by LLC from a charging order. The rules for a SMLLC can differ between states, with more business friendly states like Nevada and Delaware giving similar protection as a regular LLC. States like Florida go in the other direction, so that creditors aren’t limited to charging orders.
A charging order is a serious matter, but it doesn’t have to be the end for an LLC. If a creditor tries to do something that is legally beyond their power to collect a debt, show them what you know.