A judgment creditor of a member cannot ordinarily seize the member’s interest in an LLC or partnership. The remedy is a charging order.
What it does. Constitutes a lien on the debtor’s transferable interest and requires the entity to pay to the creditor any distributions that would otherwise go to the debtor. The creditor becomes a passive assignee of distributions.
What it does not do. Confer management or voting rights, access to information, or the ability to compel a distribution. Where the entity makes no distributions, the creditor receives nothing.
Exclusive remedy. Many statutes provide that the charging order is the sole remedy, expressly foreclosing foreclosure of the interest and judicial dissolution at a creditor’s instance. Others permit foreclosure on a showing that distributions will not satisfy the judgment within a reasonable time, after which the purchaser holds a transferable interest.
Single-member LLCs. Several courts have held that charging order protection does not apply, or applies with less force, where there are no other members to protect. Statutes in some states address this expressly.
Tax consideration. A creditor holding a charging order may be allocated taxable income without receiving cash, which is a recognised negotiating point.
Practical significance. Charging order protection is a principal reason operating businesses and investment assets are held in LLCs.