Delaware LLC Asset Protection: Everything You Need to Know
Delaware LLC asset protection is a great reason to form your limited liability company (LLC) in this state.3 min read
2. Delaware Asset Protection and Charging Orders
Updated November 24, 2020:
Delaware LLC asset protection is a great reason to form your limited liability company (LLC) in this state. In Delaware, obtaining a charging order is the only way that a creditor can seize the assets of an LLC or the ownership interest of an LLC member.
Protecting Your LLC's Assets
Small business owners typically choose to structure their business as an LLC. In addition to flexible operations, LLCs are very useful for protecting assets. While forming an LLC is often a better choice than establishing a corporation, you will need to carefully consider in which state you will form your company.
You must consider several issues when you're trying to choose a location to establish your LLC. The location you choose will determine what type of asset protection you will receive, if any. In Florida, for instance, a ruling by the Supreme Court substantially weakened the asset protections available to single-member LLCs. In Olmstead vs. FTC, the court decided that a creditor could seize a debtor's LLC membership interest to recover a debt. Due to this decision, many Florida businesses that had been planning to form an LLC decided to establish in states with stronger asset protection rules.
Wyoming, on the other hand, has been a consistently popular state for LLC formation for two reasons. First, LLC formation is very affordable in this state. Second, there is no public disclosure requirement for LLC managers and members. However, a recent court decision may put Wyoming's popularity at risk.
During the Greenhunter Energy vs. Western Ecosystems Technology case, the Supreme Court of Wyoming decided that a parent company could be held responsible for its subsidiary company's debts. This ruling was unusual because a creditor generally needs to prove fraud occurred before pursuing a parent company for a subsidiary company's debts.
If you want to maximize stability for your LLC, you should consider forming your company in Delaware, which is one of the most business-friendly states in the country.
Delaware Asset Protection and Charging Orders
Forming your LLC in Delaware provides a variety of benefits. First, your company cannot be held responsible for a member's debts and vice versa. If you are an LLC member who owes a creditor money, that creditor cannot sue your company to cover your debts, and if your LLC is ever sued, your personal assets would not be at risk from the lawsuit.
Another benefit of forming an LLC in Delaware is that the only way a creditor can pursue an LLC member's ownership interest is by acquiring a charging order. Basically, a charging order requires that the company provides the creditor with any distributions to which the member is entitled until the debt is satisfied. However, a charging order only entitles the creditor to the member's financial rights, and it does not allow the creditor to participate in running the LLC.
Creditors must follow a very strict process to obtain a charging order:
- File a personal lawsuit against an LLC member.
- Request that the court issue a charging order as part of the judgment.
- Present the charging order to the LLC.
The drawback of a charging order from the standpoint of the creditor is that it can be difficult to actually receive any distributions from the company. A charging order only gives the creditor the right to a distribution after it has been made, and it does not allow the creditor to force the LLC to make a distribution. So, the company could simply refuse to make a distribution, leaving the creditor with little recourse.
While charging orders have limitations, they are not completely ineffective. For example, while the LLC does not have to make a distribution to protect the debtor LLC member, this means that the other members would not be able to take money out of the company. As soon as a distribution occurs, the creditor with the charging order must get paid first.
Charging orders can be a nuisance for LLCs, but they don't pose the same risk in Delaware that they do in other states. In Delaware, a charging order only entitles a creditor to an individual LLC member's financial interest. Creditors cannot use a charging order to foreclose on the interest of an LLC owner or to force the company to dissolve and sell its assets.
If you need help with Delaware LLC asset protection, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.