What happens when a creditor of a Member of an LLC obtains a judgment against that Member? Historically, and as a result of the LLC’s origins in partnership law, the creditor of an LLC Member received a “Charging Order.” A Charging Order allows the creditor to attach any money distributed to the debtor/Member in connection with the Member’s Units – such as dividends, or proceeds of the liquidation of the LLC.  It does NOT allow the creditor to actually own or control those Membership Units. This is a significant restriction, since the creditor will not get paid unless the LLC decides to distribute property to the Members. On the other hand, the owner of those Units can sell them or perhaps cause a liquidation of the LLC – thereby creating liquidity to pay the judgment creditor. The Charging Order remedy is largely determined by the statutory law of the jurisdiction where the LLC was formed.

The theory behind limiting the creditor of an LLC Member to a “Charging Order” is based on the policy that innocent co-Members of the debtor Member (who is essentially a partner of the Member) should not have forced to take on a partner that he/she did not chose in the first place. The limitation of a Member’s creditor to a charging order is on one of the primary benefits of an LLC, when it comes to protection from creditors.

How does this policy play out in the case of a one-person LLC – where there are no co-Members who need protection? Where the person controlling whether the LLC distributes any money is the judgment creditor himself? At least one court has ruled that in the case of a one-person LLC, a creditor is not limited to charging order, but can attach (and take ownership of) the Member/debtor’s LLC Membership Interests.  See Olmstead v. U.S. Federal Trade Commission, Case No. SC08-1009, Supreme Court of Florida (2010).

Since the law governing LLCs is state-specific, make sure you understand the law of your particular state before relying on the Charging Order protection of a single-member LLC.