Does A California LLC Have Charging Order Protection?

by Bruce Givner on October 21, 2011

If you have an interest in a California LLC and a creditor comes after you with a judgment, the first step the creditor must take is to get the judge to issue a “charging order.”  That means that your membership interest in the California LLC is charged with the payment of the creditor’s judgment.  Of course, since you and your family or friends control the California LLC, you will cut back or eliminate the LLC’s distributions so that the creditor gets little or nothing, and the charging order will be unsatisfied.  What more can the creditor do to get paid?

In theory the judgment creditor in California can ask the court to allow the creditor to foreclose on the membership interest.  So a California LLC does not have charging order protection.  By contrast, the laws of 15 other states, such as Nevada, Delaware, South Dakota and Wyoming, only allow the creditor to get a charging order.  So, in theory, the creditor has more power in California.  However, that power is more theoretical than real.  We have never seen a creditor move for a foreclosure, partly because a foreclosing creditor will be hit with phantom income from the California LLC.  And that is a painful cost for the creditor to bear: taxable income without cash.  When determining where to form your LLC remember: A California LLC does not provide charging order protection, where as 15 other states offer such protection. www.GivnerKaye.com (310) 207-8008

{ 2 comments… read them below or add one }

Matee October 27, 2011 at 4:05 am

Super ifnromative writing; keep it up.

Reply

John Anthony Castro, J.D., LL.M. September 11, 2013 at 6:01 pm

Charging order protections follow an individual; not the LLC. A California resident does not acquire Nevada charging order protections by forming an Nevada LLC. Only Nevada residents are entitled to the charging order protections under their own law. Take a closer look at the statute. Major malpractice exposure here.

Charging order protections are like creditor exemptions; it’s based on the individual LLC member interest holder’s residency.

I would advise clients to operate all business activities through a Nevada Asset Protection Trust.

Reply

Leave a Comment

Previous post:

Next post: