Charging Order Protection for Florida LLCs

Charging order protection is the legal rule that prevents a personal creditor of an LLC member from seizing the LLC’s assets or taking over management. Florida Statute § 605.0503 limits a judgment creditor to one remedy: a charging order, which is a court-issued lien that redirects the debtor-member’s LLC distributions to the creditor.

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, and any co-owners, from one member’s personal debts.

How Does a Charging Order Work Under Florida Law?

A judgment creditor applies to a Florida court for a charging order against the debtor-member’s transferable interest in the LLC. If the court grants it, the order 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 rights of a transferee—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 manager retain full control over the company’s operations, including whether and when to distribute profits.

This limitation is what gives multi-member LLCs their strength as asset protection vehicles. The creditor cannot force money out of the LLC. The manager can retain earnings inside the company for legitimate business purposes. In many cases, this standoff produces settlements for far less than the full judgment amount.

Why Does Florida Treat Multi-Member LLCs Differently Than Single-Member LLCs?

Florida’s charging order statute makes a sharp distinction. For multi-member LLCs, the charging order is the sole and exclusive remedy. The creditor cannot foreclose on the membership interest, petition for dissolution, or obtain any rights beyond the lien on distributions.

The rationale traces back to English partnership law. Charging order protection 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 co-owners who had nothing to do with the debtor’s personal obligations.

For single-member LLCs, that rationale disappears. There are no co-owners to protect. 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 allowed the creditor to compel surrender of the entire membership interest.

The Florida Legislature responded with the 2013 rewrite of Chapter 605. The current statute allows a single-member LLC’s creditor to seek foreclosure if a charging order alone would not satisfy the judgment within a reasonable time. If the court orders foreclosure, the purchaser acquires the entire membership interest, becomes the new sole member, and gains full control of the entity and its assets.

Does the Operating Agreement Need to Be an Executory Contract?

Florida’s charging order statute protects LLC interests under state law, but federal bankruptcy law can override that protection entirely. The vulnerability turns on whether the LLC’s operating agreement qualifies as an executory contract under bankruptcy law.

In Movitz v. Fiesta Investments, LLC (In re Ehmann), 319 B.R. 200 (Bankr. D. Ariz. 2005), the bankruptcy court held that an operating agreement imposing no material obligations on a debtor-member was not an executory contract. Because it was non-executory, the bankruptcy trustee could step into the debtor’s shoes and exercise all of the debtor’s rights, including the right to dissolve the LLC, regardless of what state charging order law said.

An executory contract is one where both parties still have material obligations to perform. A lease is executory because the tenant must pay rent and the landlord must provide the space. If the operating agreement only grants the member rights (distributions, voting, access to records) without requiring the member to do anything in return, a bankruptcy court will not treat it as executory.

The fix is drafting operating agreements that impose genuine ongoing obligations on every member: contributions of services, funded capital calls, or defined management duties. These obligations must be real—a court will not credit nominal duties designed solely to create the appearance of an executory contract.

The Ehmann risk applies even to properly structured multi-member LLCs with exclusive charging order protection under § 605.0503. If the operating agreement is non-executory, a bankruptcy trustee can bypass state charging order protections entirely because federal law controls.

How Does Phantom Income Create Settlement Pressure?

When an LLC is taxed as a partnership, each member receives a K-1 allocating the LLC’s taxable income regardless of whether the LLC actually distributes cash. If the LLC earns income but the manager withholds distributions, the members still owe tax on their allocated share.

Whether the phantom income tax liability shifts to the creditor holding a charging order is one of the most debated questions in charging order law. IRS Revenue Ruling 77-137 addresses the tax treatment of partnership interest assignments, and practitioners disagree about whether a charging order constitutes an assignment for these purposes. Some argue the debtor-member remains the taxpayer; others argue the creditor effectively steps into the debtor’s position for tax purposes once a charging order is in place.

The practical strategy is to send K-1s to the creditor and force the issue. In one case a Florida attorney reported, the LLC sold property generating more than $2 million in taxable income allocable to a debtor-member’s interest subject to a charging order. The creditor received the K-1, protested, and settled the judgment for ten cents on the dollar rather than absorb the tax liability. Whether or not the IRS would have enforced the tax obligation against the creditor, the ambiguity itself created enough pressure to resolve the case.

The phantom income tactic works best when the LLC has substantial operating income and the manager has contractual discretion to retain earnings. A creditor facing years of tax liability with no corresponding cash flow has strong incentive to negotiate.

What Are Common Mistakes That Weaken Charging Order Protection?

Florida LLC owners regularly make planning errors that undermine the protections they expect to receive. The most common mistakes fall into three categories: structural errors that eliminate statutory protection, drafting failures that leave the operating agreement vulnerable, and operational mistakes that give courts a reason to disregard the LLC entirely.

Structural errors:

• Using a single-member LLC. The most consequential mistake. A single-member LLC does not receive exclusive charging order protection under Florida law. Adding a second member, typically an irrevocable trust, converts the LLC to multi-member status and triggers exclusive-remedy protection.
• Adding a token second member. A 1% membership interest held by a family member with no real involvement in the LLC may not survive judicial scrutiny. The second member should hold a meaningful economic interest and have genuine rights under the operating agreement.
• Forming in another state expecting that state’s law to apply. Florida courts apply Florida’s charging order law to Florida residents’ LLC interests regardless of where the LLC is formed. A Wyoming or Delaware LLC owned by a Florida resident does not receive Wyoming or Delaware charging order protections when the creditor sues in Florida.
• Assuming charging orders survive bankruptcy. Charging order protection is a state-law remedy. A bankruptcy trustee’s powers come from federal law and override state charging order statutes. Anyone whose financial exposure makes bankruptcy realistic needs additional planning beyond the LLC.

Drafting failures:

• Using a generic operating agreement. An off-the-shelf operating agreement may not restrict transferee rights, may not give the manager discretion over distributions, and may not require member consent for admitting new members. These provisions are what make the charging order a weak remedy for creditors.
• Failing to make the operating agreement executory. Under In re Ehmann, an operating agreement that imposes no obligations on members is not an executory contract. In bankruptcy, a non-executory agreement means the trustee steps into the debtor’s shoes with full rights. Every member should have a continuing obligation (capital contributions, management duties, or service requirements) written into the agreement.

Operational mistakes:

• Commingling personal and LLC funds. Using the LLC’s bank account for personal expenses, or routing LLC income through a personal account, gives a court grounds to pierce the corporate veil and disregard the entity entirely.
• Failing to fund the LLC. An LLC that owns no assets provides no protection. Real estate, financial accounts, and business assets must be titled in the LLC’s name. Assets that remain in the member’s personal name are not shielded by charging order protection.
• Ignoring corporate formalities. Separate bank accounts, consistent treatment of the LLC as distinct from its members, and documentation of major business decisions all reinforce the LLC’s separate existence.
• Failing to update the structure after changes. A multi-member LLC that loses a member reverts to single-member status. A divorce, death, or withdrawal can eliminate the exclusive-remedy protection without the remaining member realizing it.

Why Don’t Corporations Receive Charging Order Protection?

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 a 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 in Florida. For business owners who want the tax treatment of an S corporation 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. An S corporation election for an LLC combines self-employment tax savings with charging order protection that a standard corporation cannot offer.

Charging order protection is one of several legal strategies for protecting assets from creditors in Florida. For people with substantial exposure, combining a domestic LLC with an offshore asset protection trust moves assets outside U.S. court jurisdiction entirely. No state charging order statute alone can match that level of protection.