Charging Order Protection for Florida LLCs

A charging order is the legal mechanism by which a personal creditor of an LLC member can reach the member’s interest in the company. When a creditor obtains a judgment against an individual who owns an interest in an LLC, the creditor cannot seize the LLC’s assets, manage the business, or force the LLC to make distributions. Instead, the creditor must petition the court for a charging order, which places a lien on the member’s right to receive distributions.

If the LLC distributes money to its members, the amount that would have gone to the debtor-member is redirected to the creditor.

This limitation is what makes the LLC one of the strongest domestic asset protection structures. The charging order prevents a personal creditor from dismantling a business or reaching assets held inside the entity. It protects both the LLC’s operations and any non-debtor members from the consequences of one member’s personal liabilities.

How a Charging Order Works

A judgment creditor applies to the court that issued the judgment for a charging order against the debtor-member’s transferable interest in the LLC. The court may grant the order, which then operates as a lien on the member’s economic rights. The LLC must pay over to the creditor any distributions that would otherwise go to the debtor-member.

The creditor holding a charging order receives only the rights of a transferee. A transferee has no voting power, no management authority, no right to inspect the LLC’s books, and no ability to participate in business decisions. The creditor cannot compel the LLC to distribute funds, liquidate assets, or dissolve the business.

The non-debtor members and the LLC manager retain full control over whether and when distributions are made. If the LLC’s operating agreement gives the manager discretion over distributions, the manager can choose to retain earnings within the LLC for legitimate business purposes rather than distributing them. The creditor with a charging order receives nothing until a distribution is actually declared.

Multi-Member LLC Protection

For LLCs with more than one member, the charging order is the sole and exclusive remedy available to a judgment creditor under Florida law. The creditor cannot foreclose on the debtor-member’s interest, cannot petition for dissolution of the LLC, and cannot obtain any rights beyond the lien on distributions.

This exclusive-remedy status is what gives multi-member LLCs their strong asset protection character. A creditor with a charging order against a multi-member LLC interest faces the prospect of waiting indefinitely for distributions that may never come, while the LLC’s assets remain fully protected inside the entity. In practice, this dynamic often motivates creditors to negotiate settlements for significantly less than the full judgment amount.

The protection exists because the charging order remedy was designed to prevent one member’s personal creditors from disrupting a business that other innocent members depend on. Allowing foreclosure or dissolution would harm the non-debtor members who have no connection to the debtor’s personal obligations.

Single-Member LLC Vulnerability

The Florida Supreme Court’s 2010 decision in Olmstead v. FTC, 44 So. 3d 76 (Fla. 2010), held that the charging order was not the exclusive remedy for creditors of a single-member LLC owner. The court reasoned that the policy justification for limiting creditors to a charging order—protecting innocent co-members—does not apply when there are no other members to protect.

The Florida Legislature responded by enacting what practitioners call the “Olmstead Patch” in the 2013 rewrite of Chapter 605. Under the current statute, if a single-member LLC’s sole member faces a judgment creditor, the creditor can ask the court to order a foreclosure sale of the membership interest if distributions under a charging order would not satisfy the judgment within a reasonable time. The creditor can request this showing at the same time it applies for the charging order itself.

If the court orders foreclosure, the purchaser at the sale acquires the member’s entire LLC interest, becomes the new sole member of the LLC, and gains full control of the entity and its assets. The original member ceases to be a member entirely. This outcome is dramatically worse than a charging order, which leaves the member in place and gives the creditor only a passive lien.

Phantom Income and Settlement Pressure

When an LLC is taxed as a partnership, each member receives an allocation of the LLC’s taxable income on a K-1, regardless of whether the LLC actually distributes cash. If the LLC earns income but makes no distributions, the members still owe tax on their allocated share.

The interaction between this tax treatment and charging order protection creates settlement pressure. If the LLC retains all earnings and makes no distributions, the debtor-member receives no cash but still owes income tax on the allocated earnings. The creditor with the charging order also receives nothing. Meanwhile, the LLC’s assets continue to grow inside the entity, beyond the creditor’s reach.

Whether the phantom income tax liability falls on the debtor-member or the creditor holding the charging order is a point of frequent confusion. Under IRS Revenue Ruling 77-137, the debtor-member remains the taxpayer for purposes of the K-1 allocation until a foreclosure or assignment actually transfers the membership interest. The creditor holding only a charging order does not receive the K-1 and does not owe the tax. The phantom income burden therefore falls on the debtor, not the creditor, as long as the charging order remains in place without foreclosure.

Strategies to Maximize Protection

Several planning steps strengthen charging order protection for Florida LLCs.

The most important step is ensuring the LLC has more than one bona fide member. A multi-member LLC receives exclusive charging order protection, while a single-member LLC does not. The second member need not hold a large economic interest. A spouse, family member, or entity holding even a small percentage of the membership interest converts the LLC from single-member to multi-member status for purposes of the statute.

For married business owners, owning the membership interest jointly with a spouse as tenants by the entirety adds a separate layer of protection. Entireties property is immune from the creditors of either individual spouse, and this protection applies to LLC membership interests when properly structured.

The operating agreement should give the manager broad discretion over distributions, explicitly provide that the charging order creditor receives only the economic rights of a transferee, and prohibit a transferee from participating in management. These provisions reinforce the statutory protections by contract.

Maintaining the LLC as a genuine separate entity is also essential. Commingling personal and LLC funds, failing to observe the operating agreement, or using the LLC as a personal alter ego can lead a court to pierce the corporate veil and disregard the entity entirely, eliminating charging order protection along with the liability shield.

Charging Orders Compared to Corporate Stock

Charging order protection is unique to LLCs and partnerships. Corporations do not receive this protection. A judgment creditor of a corporate shareholder can levy and sell the shareholder’s stock to satisfy the judgment. The purchaser at the sale becomes a shareholder with full voting and economic rights.

This distinction is one of the primary reasons the LLC is the preferred entity for asset protection planning. The comparison of business structures discusses how this difference affects entity selection.

For business owners who want the self-employment tax benefits of an S corporation election while retaining charging order protection, the solution is to form an LLC and elect S corporation tax treatment. The entity remains an LLC for legal purposes, preserving the charging order as the exclusive creditor remedy, while being taxed as an S corporation. The S corp vs. LLC comparison addresses this structure in detail.

The LLC overview provides the broader context for how charging order protection fits within a comprehensive Florida asset protection strategy.