Charging Order Protection

Charging order protection is the legal barrier that prevents a personal creditor of an LLC member from seizing the LLC’s assets. A creditor who sues an LLC owner personally cannot take the company’s bank accounts, real estate, or equipment. The creditor gets a charging order instead, a court-issued lien that redirects any distribution the LLC would have paid the debtor-member.

The protection runs in the opposite direction from the liability shield most people associate with LLCs. The liability shield protects the owner from the company’s debts. Charging order protection protects the company from the owner’s debts. How strong that protection is depends on the LLC’s home state, the number of members, and how the operating agreement is drafted.

How a Charging Order Works

A judgment creditor applies to the court for a charging order against the debtor-member’s transferable interest in the LLC. If the court grants the order, it creates a lien on distributions. Any money the LLC would have paid to the debtor-member gets redirected to the creditor instead.

The creditor holding a charging order receives only the economic rights of a transferee. A transferee has no voting power, no management authority, no access to the LLC’s books, and no ability to compel distributions. The non-debtor members and the LLC manager retain full control over the company’s operations, including whether and when to distribute profits.

Charging orders work in practice because the creditor cannot force money out of the LLC while the manager can keep earnings inside the company for legitimate business purposes. A creditor who waits for distributions that never come often settles for far less than the full judgment amount.

When two creditors pursue the same member’s LLC interest, the first to obtain a charging order from a court takes priority over one who merely holds a recorded judgment lien. The Florida First District Court of Appeal applied that rule in Capstone Bank v. Perry-Clifton Enterprises, LLC, 230 So. 3d 970 (Fla. 1st DCA 2017). A former spouse recorded an Alabama divorce judgment against her ex-husband’s membership interest but never asked a court for a charging order, and a bank that applied later came ahead of her.

The charging order exists to protect an LLC’s other members rather than its debtor. It keeps them from sharing governance with someone they did not choose, or from accepting another member’s creditor as a co-manager. Courts that read the remedy against that purpose have narrowed it where the debtor is the only member and no one else’s interest is affected.

Exclusive Remedy vs. Non-Exclusive Remedy

Charging order protection is strongest in states whose statute both makes the charging order the exclusive remedy and bars foreclosure of the charged interest. Those are two separate provisions, and a statute can carry the first without the second. Delaware, Nevada, Texas, Connecticut, and Wyoming bar foreclosure outright. California’s statute calls the charging order exclusive and still lets a court order the interest sold once distributions look too slow to pay the judgment.

In non-exclusive-remedy states, the charging order is a starting point. A creditor may also seek foreclosure on the debtor’s membership interest, a court-ordered sale, or other equitable relief. Foreclosure allows the creditor to acquire the membership interest outright, potentially gaining access to the underlying assets.

Most states now treat the charging order as the exclusive remedy against a multi-member LLC interest. A minority give the creditor more. Colorado, Indiana, Massachusetts, New York, Georgia, and Missouri are among the states with no exclusive-remedy language, so nothing confines a creditor to the charging order. The Revised Uniform Limited Liability Company Act is not the protective end of this range. Its section 503 makes the charging order exclusive but lets a court foreclose the lien once distributions look too slow to pay the judgment, so an unmodified adoption leaves that route open.

Why Single-Member LLCs Are Vulnerable

Single-member LLCs face weaker charging order protection in states that draw a line between one-member and multi-member LLCs. With no co-owners to shield, the reason for confining a creditor to a charging order runs out. Only a minority of states draw that line. Connecticut, Delaware, Nevada, Texas, and Wyoming bar foreclosure no matter how many members an LLC has, and a California court can order the interest sold whether the LLC has one member or ten.

The landmark case is Olmstead v. FTC, 44 So. 3d 76 (Fla. 2010). The Florida Supreme Court held that Florida’s charging order statute did not stop a court from ordering the owner of a single-member LLC to surrender the entire membership interest. Its reasoning was textual. A sole member can freely transfer the whole interest, and nothing in the LLC act made the charging order exclusive or abolished the older creditor remedy of levy and sale.

The federal bankruptcy court reached a similar conclusion in In re Ashley Albright, 291 B.R. 538 (Bankr. D. Colo. 2003). A bankruptcy trustee could exercise all rights of a sole member, including management and liquidation rights, because the debtor’s entire LLC interest was property of the estate.

Florida responded in 2011 by amending its LLC statute, a change a Florida appellate court later called the Olmstead patch. It added the exclusive-remedy language the old statute had lacked, and at the same time it created a foreclosure remedy against a single-member LLC where distributions will not satisfy the judgment within a reasonable time. Both rules now sit in section 605.0503.

The fix for single-member LLC vulnerability is straightforward: add a second member. An irrevocable trust is the most common second member because it avoids the complications of bringing in another individual. With two members, the LLC qualifies for exclusive-remedy treatment in states that limit enhanced creditor remedies to single-member entities. The second member should have a meaningful economic interest. A token 1% stake that a court might disregard does not solve the problem.

Which States Provide the Strongest Protection?

Wyoming, Nevada, Delaware, Texas, and Connecticut are among the states with the strongest charging order statutes. Wyoming’s section 17-29-503(g) makes the charging order the exclusive remedy against any judgment debtor, and it names the sole member of a single-member LLC. Foreclosure and court-ordered accounts or inquiries are barred outright. The statute also blocks the creditor from reaching the company’s own assets.

Strongest protection. Delaware bars foreclosure, attachment, and garnishment against a member’s interest whether the LLC has one member or more, and separately blocks any creditor from reaching the company’s property (6 Del. C. § 18-703). Nevada bars foreclosure on a member’s interest at either member count. Texas bars foreclosure of the charging order lien and applies that rule to single-member and multi-member LLCs alike. Connecticut, too, bars all three remedies, with no exception for the single-member LLC.

Moderate protection. A smaller group of states gives a sole member less than a multi-member LLC gets. Florida confines foreclosure to sole members. New Hampshire allows execution sales once distributions look too slow to pay the judgment. Arkansas does the same, and also opens foreclosure against a multi-member LLC where a member has cut off distributions in bad faith. In Idaho, Iowa, Pennsylvania, Utah, Vermont, and Wisconsin, foreclosure is open against any LLC, but a purchaser at the sale of a sole member’s interest acquires the entire membership and the debtor stops being a member.

Weakest protection. California’s statute calls the charging order the exclusive remedy and then gives the court several ways around it. The court can appoint a receiver over the distributions, with power to make the inquiries the debtor could have made. It can also foreclose the lien and order the transferable interest sold once distributions look too slow to pay the judgment. The buyer takes only that interest and does not become a member. Where a statute never makes the charging order exclusive, a creditor is not confined to that remedy at all.

State	Exclusive Remedy (Multi-Member)	Single-Member Protection	Foreclosure Allowed
Wyoming	Yes	Yes (statutory)	No
Delaware	Yes	Yes (statutory)	No
Nevada	Yes	Yes (statutory)	No
Texas	Yes	Yes (statutory)	No
Connecticut	Yes	Yes (statutory)	No
Florida	Yes	No (foreclosure available)	Yes (single-member only)
California	Yes in name only	No	Yes

The Phantom Income Problem

A creditor holding a charging order against an LLC interest may owe federal taxes on income it never receives. Revenue Ruling 77-137 requires an assignee who has taken substantially all dominion and control over a partnership interest to report the distributive share even in a year with no cash distribution. A charging order gives its holder a lien and no control at all. Whether the ruling reaches a creditor in that position is unsettled; no court has decided the question.

This is what practitioners call phantom income. The creditor’s tax bill grows while the cash stays inside the LLC, and the longer the manager withholds distributions, the worse the creditor’s economics get.

Not every charging order triggers phantom income. The tax treatment depends on the LLC’s operating agreement, how income is allocated among members, and whether the charging order constitutes an assignment for tax purposes. But the risk is real enough that sophisticated creditors factor it into their analysis before seeking a charging order. For the member being collected against, the possibility of that tax bill is one more reason a creditor may prefer to settle.

Does State of Formation Control?

The state where an LLC is formed usually controls the charging order question, but not always. A court enforcing a judgment normally applies the LLC’s home state law, so an owner who forms in Wyoming, Delaware, or Nevada for asset protection often does get those states’ rules.

The internal affairs doctrine generally provides that an LLC’s home state law governs its internal matters, including the scope of charging order remedies. Most courts follow this doctrine. A Florida resident sued in Florida, with assets held in a Wyoming LLC, would typically have the charging order question resolved under Wyoming law.

Courts can apply the law of the state with the most substantial relationship to the dispute instead. A Connecticut court applied its own charging order statute without any choice-of-law analysis in Rockstone Capital, LLC v. Marketing Horizons, Ltd., 2013 WL 4046597 (Conn. Super. Ct. July 17, 2013). The judgment debtor objected that the LLC was a foreign entity, and the court charged his interest in the company anyway.

The risk is highest when the LLC is a passive holding entity managed and operated entirely in a state with weaker protections. The more substance the LLC has in its formation state (real operations, a physical office, assets held there), the more likely courts are to respect that state’s law. Forming an LLC in Wyoming but running it entirely from California does not guarantee Wyoming protections in a California court.

What Bankruptcy Does to Charging Order Protection

Charging order protection is a creation of state law, and federal bankruptcy law can displace it. Whether it does turns on how many members the LLC has and on whether the debtor moved the interest to keep it from creditors.

When a debtor files for bankruptcy, 11 U.S.C. § 541 sweeps all property interests into the bankruptcy estate, including LLC membership interests. What the trustee can do with that interest depends on whether anyone else is a member. A sole member’s whole interest passes to the trustee, who then holds the power to manage the company and liquidate what it owns. If other members exist and withhold consent, the estate collects only the debtor’s share of profits and distributions.

The Albright court reached that result under a Colorado statute that conditioned a transferee’s management rights on the consent of other members, and its footnote 9 says a single non-consenting member, however small her stake, would have changed the outcome. Colorado has since rewritten that section. Wyoming drafted differently from the start, making the charging order the exclusive remedy against any judgment debtor including a sole member and barring foreclosure outright.

The same footnote warned that a token second member is no shelter. A debtor who brings in a peppercorn co-member to defeat creditors still faces the avoidance provisions, and the opinion names 11 U.S.C. §§ 544(b)(1) and 548(a). Section 548(e) reaches further back, ten years, but it applies only to a transfer the debtor made to a self-settled trust or similar device of which the debtor is a beneficiary. It also requires actual intent to hinder, delay, or defraud a creditor.

Anyone whose finances make bankruptcy realistic has to plan around this. A state charging order statute binds judgment creditors collecting through state court, and it does not control what a trustee may do with a sole member’s interest once the case is filed.

How to Strengthen Charging Order Protection

Charging order protection is not automatic. The strength depends on how the LLC is structured, where it is formed, and what the operating agreement says.

Use a multi-member structure. A single-member LLC is the weak case in every state that draws the one-member line. Adding a second member, typically an irrevocable trust, eliminates the rationale courts use to expand creditor remedies. The second member should have a real economic interest, not a token stake that a court might disregard.

Draft the operating agreement for protection. The operating agreement should give the manager sole discretion over distributions and restrict transfers of membership interests. It should require unanimous consent for any new member to be admitted. A creditor holding a charging order receives only a transferee’s rights, and the operating agreement defines how limited those rights are.

Choose the formation state deliberately. Wyoming, Nevada, Delaware, Texas, and Connecticut all bar foreclosure and cover single-member LLCs by statute. But a court applies the formation state’s law only if the LLC has a genuine connection to that state. An LLC formed in Wyoming but operated entirely in California is unlikely to receive Wyoming’s protections in a California court.

Keep the company separate in fact. A creditor who cannot reach the LLC through a charging order may try to reach it by arguing the company and the member are the same. Florida preserves that route expressly, leaving alter ego and constructive trust available alongside the charging order. Courts weighing such a claim look at whether the LLC kept its own bank accounts, was funded well enough to do business, and was treated as distinct from its owner.

The Connecticut Appellate Court held two LLCs liable for their owner’s personal judgment in Litchfield v. Howell (2002), where she treated company funds as her own and took no distributions a creditor could charge.

Pair the LLC with an offshore trust for higher-value assets. Charging order protection, even at its strongest, is a domestic remedy inside the U.S. legal system, and a judgment creditor with enough resources can wait out a domestic standoff. Assets held by an offshore asset protection trust sit outside the reach of a U.S. court. For someone with substantial exposure, a domestic LLC under an offshore trust reaches further than any state charging order statute on its own.