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 normally holds a judgment creditor to a single remedy: a charging order, which is a court-issued lien that redirects the debtor-member’s LLC distributions to the creditor. A sole member’s interest can still be sold by court order.

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.

That limit is why multi-member LLCs work 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 protects a multi-member LLC more than a single-member LLC because the company has co-owners who owe the creditor nothing. For multi-member LLCs, the charging order is the sole and exclusive remedy. Section 605.0503(6) bars foreclosure against a multi-member LLC interest entirely. Subsection (7) still leaves the creditor its fraudulent transfer and alter ego claims.

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 Legislature answered in 2011, amending section 608.433 of the old LLC act to add a foreclosure remedy against a sole member’s interest. That remedy moved into Chapter 605 when the Legislature rewrote the whole statute two years later. 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 controls everything the LLC owns.

Does the Operating Agreement Need to Be an Executory Contract?

No Florida statute requires an LLC’s operating agreement to be an executory contract, but whether it is one changes what a bankruptcy trustee can do with a member’s interest. If the agreement is not executory, the trustee has an argument for taking more than the right to distributions.

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, regardless of what state charging order law said.

Under the traditional test, 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. The Eleventh Circuit has also recognized a functional test, under which a one-sided agreement can be executory when assuming or rejecting it would benefit the estate. In In re Soderstrom, a Florida LLC’s operating agreement was executory under either test. The trustee, lacking the other member’s consent, could not assume it and could sell only the debtors’ economic interest.

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 may argue that state charging order protections do not apply in the bankruptcy case.

How Does Phantom Income Create Settlement Pressure?

Phantom income creates settlement pressure because a creditor holding a charging order may face tax on LLC income that the manager never distributes. 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.

One of the most debated questions in charging order law is whether the phantom income tax liability shifts to the creditor holding a charging order. 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. A creditor who receives a K-1 allocating a large share of taxable income has to decide whether to contest the treatment or discount the judgment. No court has settled whether the tax liability shifts to the creditor.

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?

The mistakes that weaken charging order protection 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. A federal court in Florida held in Wells Fargo Bank v. Barber that a Florida member’s LLC interest sits where the member lives, so Florida’s collection rules reach it wherever the company was formed. No Florida appellate decision settles the question. Courts in other states have located the interest at the company’s home instead. Planning around a Wyoming or Delaware LLC works only if a Florida court departs from Barber and the federal decision that followed it.
• Assuming charging orders survive bankruptcy. Charging order protection is a state-law remedy, and a member’s interest passes to the bankruptcy estate when the member files. What the trustee can then do with that interest turns on the number of members and on the operating agreement. 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 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, courts disagree about how far that goes. The Ehmann court held the trustee takes the member’s rights in full, while other courts limit the estate to the economic rights an assignee would have. 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, is the first evidence a creditor’s attorney looks for in a claim to pierce the corporate veil. Florida appellate courts have held that commingling alone does not establish the claim, but it is the evidence a creditor builds on.
• 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.

Assets moved into a corporation to escape an existing debt can be reached as well. A creditor attached a corporation’s horse farm for its controlling shareholder’s debt in Estudios v. Swiss Bank, 507 So. 2d 1119 (Fla. 3d DCA 1987). The shareholder had formed the corporation and moved the farm into it to put it beyond his creditors.

The difference between a stock levy and a charging order 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. 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, an offshore asset protection trust can own the LLC. A U.S. court cannot compel its foreign trustee. No state charging order statute alone can match that level of protection.