Will a Member’s Debts Put LLC Assets at Risk?

One reason why a business owner may choose to form a limited liability company is to protect a business owner’s personal assets from the owner’s business debts. As long as proper corporate formalities are observed, the limited liability company acts as a shield to protect the personal assets of the LLC owner or “member.” However, what happens when the individual member gets a judgment against him or her personally? Can the creditor of the individual member reach the member’s ownership interests in the LLC, or even the assets owned by the LLC?

Indiana has a statute providing for a “charging order,” which is the exclusive remedy for a member’s creditors seeking to recover money from the member’s interest in the LLC. In Indiana, the charging order statute may be used by the creditors of an individual member to reach the economic rights of the individual member in the LLC. In other words, a court can order that any amounts that the LLC would have paid to the owner, must now be paid to the business owner’s creditor. The creditor does not receive the rights to vote in the LLC or to participate in the management of the LLC. The creditor does not become a member of the LLC. The creditor’s interest is only limited to any distribution that the member would receive from the LLC. The creditor cannot reach the assets held by the LLC.

Indiana case law has interpreted the charging order statute to apply both to multi-member LLCs and single member LLCs. However, the charging order is a very limited remedy. Since the creditor’s interest does not extend to any management rights in the LLC, the creditor cannot force a monetary distribution to the owners. Thus, it is unlikely that a creditor will actually recover funds as a result of obtaining the charging order.

Laura Scott