If you own a Limited Liability Company (LLC) — or are considering forming one — you may have come across the term “charging order.” But what is a charging order against an LLC, and why is it important to understand?
A charging order is a legal tool that protects the business interests of LLC owners from personal creditors, while still allowing those creditors to claim certain economic rights. In this article, we’ll explain:
- What a charging order is
- How it affects LLC members and creditors
- Why it matters for asset protection
- How different states treat charging orders
What Is a Charging Order?
A charging order is a court-authorized lien (legal claim) that allows a creditor to receive a debtor’s share of distributions from an LLC — but it does not give the creditor control over the business or access to its assets.
In other words, the creditor can “stand in line” to collect any profits or distributions owed to the LLC member, but they do not become an owner or gain voting rights in the company.
Charging orders are often used when:
- An LLC member is sued personally and loses
- The court awards a judgment against the member
- The creditor wants to collect on that judgment
Key Features of a Charging Order
- It applies only to the debtor-member’s economic rights — not management control
- It protects the other members and the LLC itself from direct involvement in the member’s personal debts
- It prevents creditors from forcing the LLC to make distributions
- It may expire after a set time if no distributions are made
Example: How a Charging Order Works
Let’s say Sarah owns 40% of an LLC with two other partners. She loses a personal lawsuit, and the court awards her creditor $50,000. The creditor cannot take over Sarah’s share of the business, fire employees, or access the LLC’s bank account.
Instead, the court may issue a charging order. If and when the LLC makes profit distributions to its members, the creditor is entitled to Sarah’s share — up to the amount of the judgment.
Why Charging Orders Matter to LLC Owners
1. Asset Protection
Charging orders are one of the key asset protection features of LLCs. They prevent creditors from disrupting business operations or seizing ownership rights.
2. Business Continuity
Even if one member has personal legal trouble, the LLC can continue operating normally without interference.
3. Limited Remedies for Creditors
Creditors may wait a long time to collect — especially if the LLC doesn’t make regular distributions. In some states, this discourages lawsuits or encourages early settlement.
Charging Order Protection: Single-Member vs. Multi-Member LLCs
Multi-Member LLC
Most states offer strong charging order protection for multi-member LLCs. Creditors are limited to charging orders and cannot force a sale or take control.
Single-Member LLC
Some states are less protective of single-member LLCs. Courts in certain jurisdictions have ruled that creditors may be able to seize full control of the business.
That’s why choosing the right state to form your LLC (like Wyoming, Nevada, or Delaware) can make a big difference in asset protection.
Can a Charging Order Be Avoided?
LLC members can prepare in advance by:
- Forming the LLC in a state with strong charging order laws
- Including specific language in the operating agreement
- Using trusts or holding companies for added protection
- Avoiding personal guarantees and mixing personal/business assets
Once a creditor obtains a judgment, it’s too late to restructure your LLC — so proactive planning is key.
Final Thoughts
A charging order is a powerful legal mechanism that strikes a balance between creditor rights and business protection. It allows creditors to collect debt without disrupting the LLC — and protects other members from being impacted by one member’s financial issues.
If you’re forming an LLC or currently own one, it’s essential to:
- Understand charging order rules in your state
- Structure your LLC to minimize liability exposure
- Include protective provisions in your operating agreement
At FormLLC, we help business owners form LLCs with smart legal structures — including asset protection strategies, registered agent services, and compliance support in all 50 states.
