I am a member of a multi-member limited liability company. I owed a substantial amount on one of my old personal credit cards, which was turned over to a collection agency. The agency obtained a judgment against me. I have no real personal assets to speak of. Can the collection agency come after the LLC to satisfy the judgment?
Yes, though depending on the jurisdiction the LLC is organized in, the agency may not be able to collect. In all states, creditors of a member of an LLC can obtain a “charging order” against an LLC member’s membership interest. A charging order is an order issued by a court directing an LLC’s manager to pay to a member’s personal creditor any distributions of funds that would otherwise by paid to the member. A charging order only allows a creditor to obtain the member’s “financial rights.” The creditor does not obtain the member’s voting, management and other rights. Thus, the creditor cannot order the LLC to make a distribution. Most LLC managers will not order a distribution if part of a member’s share is going to go towards a creditor.
New York, unlike some other states, does not provide that a charging order is the exclusive remedy of an LLC member’s personal creditor. Thus, in addition to obtaining a charging order, a creditor may be able to have a court order that the member’s interest in an LLC be foreclosed upon. If this happens, the creditor will become the permanent owner of the member’s financial rights, and will thus have the right to any distributions due the member. In addition, the creditor winning foreclosure can also seek a court order dissolving the LLC and selling its assets to pay the creditor’s judgment, though a court is not likely to issue such an order for a multi-member LLC, when there are other parties to consider. (Normally by this point the LLC will have worked out an arrangement with the creditor.) Still, the possibility of such a harsh outcome makes New York one of the least attractive states in which to form an LLC, at least as far as member protection from personal creditors is concerned.
In the District of Columbia, as in New York, a creditor who obtains a charging order can have the court order that a debtor’s LLC membership interest be foreclosed upon.
In Georgia, unless the LLC operating agreement provides otherwise, an LLC member’s personal creditors cannot foreclose on a member’s LLC financial interest or have a court order an LLC dissolved and its assets sold.
Remember that you do not have to form your LLC in the state where you live or do business. However, doing so will not save you in taxes, because your LLC will have to qualify to do business in the state where it operates and will have to pay the same taxes as any other LLC operating in the state. (In addition to annual fees in the state in which the LLC chooses to organize.)
I represent many entrepreneurs and small businesses, and asset protection issues come up all the time. Please contact me today at Gary.Ross@JacksonRossLaw.com for questions regarding personal creditors and your business.