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Charging Order

By IncNow | Published October 8, 2013

When a member of an LLC incurs personal debts, the creditor who wins a judgment often tries to collect the judgment. If the debtor is a member of an LLC, often that creditor wants to seize that asset as he is looking to get repaid. However the creditor is out of luck when it comes to seizing the debtor’s membership interest. Instead of being able to either (1) conduct a hostile take-over and operate the debtor’s LLC or (2) sell the debtor’s membership interest to someone who might want to be a member, the creditor gets only a “non-voting interest” and right to collect dividends, if the LLC decides to issue dividends. This is a very weak and undesirable remedy for the judgment creditor. This provides the debtor the ability to continue to operate the LLC with virtual impunity. This does not give the creditor an ownership interest and it terminates once the amount owed is paid in full at which time the debtor gets his interest back from the creditor, releasing the charging order. This protection is not afforded to corporate stockholders. This is one significant advantage in the LLC over the corporate form. The attempt of a creditor to drill down and collect the assets of the LLC is sometimes referred to as a “reverse-pierce”: a reference to the corporate veil used to protect owners from business liability, may also be implemented in reverse in the case of an LLC.

When deciding where to form your company, consider that Delaware has advantages over your home state that may benefit you. Go