Asset Protection
Charging order protection, and why your LLC’s state matters.
Two identical LLCs can offer wildly different protection, depending only on where they’re formed. The reason is a piece of law most owners have never heard of: the charging order.
People form LLCs assuming the protection is uniform. It isn’t. When the threat is an “outside” claim, a personal lawsuit against you, not against the business, the entire question of whether your LLC protects you comes down to charging-order law, which varies enormously from state to state.
What a charging order does
If a personal creditor gets a judgment against you, they want at your LLC. A charging order stops them from seizing your membership interest or the LLC’s assets; instead, they get only a “lien” on distributions the LLC chooses to make. If the manager makes no distributions, the creditor collects nothing, and may even owe tax on income they never received. That’s powerful protection.
Where it’s strong, and weak
The protection is only as good as the state makes it. In strong states, the charging order is the creditor’s sole and exclusive remedy, they can never force a sale or foreclose. In weaker states, courts allow foreclosure on the interest or other remedies that let a creditor reach the assets. Critically, many states extend strong protection only to multi-member LLCs and give single-member LLCs little or none.
What makes a state strong for LLCs
- Charging order is the exclusive remedy, no foreclosure, no forced sale
- Protection extends to single-member LLCs, not just multi-member
- Strong privacy and low ongoing cost, Wyoming is the classic example
What to do about it
Form or re-domesticate important LLCs in a strong charging-order state, avoid relying on a bare single-member LLC in a weak state, and for real wealth own the structure through an asset protection trust. Tresp, Day & Associates helps owners choose the right state and structure, and, through Tresp Corporate Services, form and maintain entities in all 50 states. Call (858) 755-6672.
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Since 1992, Tresp, Day & Associates has structured asset protection for families and businesses nationwide. Request a consultation or call (858) 755-6672.
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Common questions
Frequently asked
What is a charging order and why does it matter?
A charging order is a court remedy that limits a personal creditor of an LLC owner to receiving distributions the LLC chooses to make, rather than seizing the owner's interest or the LLC's assets. Where it's the creditor's exclusive remedy, as in Wyoming and Nevada, LLC protection is strong. It matters because it's the main thing standing between your personal creditor and the assets inside your LLC.
Which states have the strongest charging order protection?
Wyoming, Nevada, and a handful of others make the charging order the creditor's sole and exclusive remedy, no foreclosure or forced sale, and extend that protection to single-member LLCs, not just multi-member ones. Many other states offer weaker protection, especially for single-member LLCs, where a creditor may be able to reach the assets inside.
This article is general information, not legal or tax advice, and does not create an attorney-client relationship?
This article is general information, not legal or tax advice, and does not create an attorney-client relationship. Every situation is different and the law changes; consult a qualified attorney about your circumstances.
This website is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Every situation is different; please consult a qualified attorney about your specific circumstances.
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