Charging orders are meant to balance the rights of creditors with the protection of non-debtor partners in an LLC organization. Basically, this kind of court order allows creditors to collect their debts from the income that a debtor might receive from a partnership in an LLC company. At the same time, it imposes certain limitations that reduce its impact upon the entire partnership.
For example, a charging order doesn’t allow the creditor to attach assets that belong to the actual organization, take income from non-debtor partners, or involve themselves in the management. These limitations offer many of the same protections that a corporation would enjoy.
Still, some LLC companies only have one partner. These single-member LLCs have proven to be exceptions to these rules in some places. It really depends upon how local courts have decided to apply the rules.
The Basics of Charging Orders
The simplest way to understand a charging order is to think of it as a type of wage garnishment. It’s only meant to collect money from a debtor partner. That’s why it has some built-in protections that keep the non-debtor partners or the entire organization from getting punished. While the debtor partner is forced to give up his or her distribution, the other partners may be relatively unaffected.
How Single-Member LLC Organizations Are Impacted By Charging Orders
Of course, if the only partner in the LLC is the debtor, it’s fair to ask if that single-member LLC would have the same protection. After all, if the only member is the debtor, there won’t be any non-debtor partners to protect. Creditors may content that it’s not fair to offer these same protections in a situation like this.
Actually, this issue is still evolving in some jurisdictions. In states with laws that are more friendly to debtors, the LLC would still only face a typical charging order. In other words, the debtor’s income might be attached until the debt is paid off, but the company could retain assets. Managed correctly, the LLC has every chance to weather the judgment.
However, some courts have ruled that a single-member LLC doesn’t have the right to these protections. In these cases, the creditors have been granted the right to pursue harsher remedies. In fact, they can even force a foreclosure or have the LLC dissolved. However, a number of states have changed laws to make it clear that they intend for a single-member LLC to enjoy the same protections as an LLC with multiple partners.
Why Is The Distinction Between Single- And Multiple-Member LLCs Important?
Single-member LLCs are a fairly new type of organization. In some places, courts and legislatures are still figuring out exactly how they should be treated. In other places, they get exactly the same treatment as a multiple-member LLC. In any case, it’s important to make these distinctions when trying to decide if it’s a good idea to form a single-member LLC or it would be safer to find a partner.