Creditors’ Rights: Can My Creditors Go After the LLC’s Assets?
In Delaware, as in most other states, LLC members are generally not liable for the debts, obligations, and liabilities of the LLC. We say generally, because there are situations where LLC members can be personally liable for business debts so as to allow courts to “pierce the corporate veil” based on, for example, fraud, intermingling of personal and business affairs, and improperly drafted operating agreements. This is a highly fact-intensive analysis, the result of which may vary significantly depending on the specific circumstances and the jurisdiction.
Conversely, an LLC’s assets are generally not subject to claims by creditors of LLC members for their personal debts. There are, however, ways for creditors of LLC members to get to the LLC itself. In Delaware, New York, and Texas, as in many other states, a creditor with a judgment against an LLC member can apply for a “charging order” to satisfy the judgment.[1] A charging order gives the creditor the right to receive distributions from the LLC to which the debtor/member would otherwise have been entitled, if any, but nothing else, such as the right to order distributions or participate in the LLC’s management.
In Delaware and Texas, on one hand, a charging order is the exclusive remedy by which a creditor may satisfy a judgment out of the debtor’s LLC interest.[2] So, for example, if the LLC does not make any distributions, a creditor with a charging order gets nothing. In New York, on the other hand, the statute is silent as to whether a charging order is the exclusive remedy. This seems to imply that personal creditors in New York are not limited to obtaining a charging order, but may possibly pursue other remedies, such as foreclosure on the debtor/member’s LLC interest and even a court order to have the LLC dissolved and its assets sold to pay the creditor’s judgment. In other words, New York, when it comes to protection from personal creditors, may be among the least attractive states in which to form an LLC.[3]
This post was a part of a multi-post blog series on comparison of LLC statutes. You can find the other posts by searching our blogs. In our next post, we will discuss fiduciary duties in these states.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064.
[1] Del. Code Ann. tit. 6, § 18-703(a); N.Y. LLC Law § 607(a); Tex. Bus. Org. Code § 101.112(a).
[2] Del. Code Ann. tit. 6, § 18-703(d); Tex. Bus. Org. Code § 101.112(d).
[3] NOLO, LLC Protection for Members’ Personal Debt in New York, http://www.nolo.com/legal-encyclopedia/llc-protection-members-personal-debt-new-york.html (last visited Feb. 20, 2015).