Charging Orders - Asset Protection


While only a small number of assets are statutorily protected from claims of creditors, membership interests in limited liability companies (LLCs) and partnership interests are afforded a significant level of asset protection due to the requirement that a creditor obtain a charging order from a court in order to seize distributions payable to the creditor. Due to the limitations placed on creditor’s collection remedies when a debtor has personal assets invested in an LLC or partnership, these entities offer a degree of asset protection.

It is important to be aware that single-member LLCs are not likely to provide the single member with the protection that would be afforded if the LLC had two or more members. For this reason, we always recommend that LLCs have two or more members if possible.

A charging order is a court order that is available to judgment creditors directed to an LLC or partnership that grants the creditor the right to receive any distributions that would otherwise be due to the debtor partner or member whose interest is being charged.

While California law permits a judgment creditor to foreclose on the charged interest, the purchaser at the foreclosure sale (which is almost always the creditor), becomes only an assignee of the economic right to the judgment debtor’s cash distribution, if any. Therefore, the judgment creditor does not become a partner and is not permitted to participate in LLC or partnership management decisions. A judgment creditor who forecloses may also be subject to adverse tax consequences because he or she may be considered a partner for tax purposes. If the judgment creditor does not foreclose, but only seeks distributions that may be made, he or she will not suffer any adverse tax consequences. Adverse tax consequences come about when the LLC or partnership earns income, but does not distribute it. Often, friendly co-owners assist the judgment debtor by not making any distributions. While judgment creditors may seek a charging order and may foreclose, most do not.




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