Charging Order Protection for LLCs in Texas
A charging order is a court order that lets a creditor of an LLC member collect distributions the LLC makes to that member. In Texas, a charging order is generally the exclusive remedy for a creditor of a member, which means the creditor cannot take over the LLC or seize its assets. It works best for multi-member LLCs, applies less clearly to single-member LLCs in some courts, and does not protect against the LLC's own debts or your own wrongdoing.
How it works
If someone gets a judgment against you personally and you own an LLC interest, they cannot simply seize the LLC's assets or force a sale of its property. Their remedy is a charging order, which gives them a right to receive any distributions the LLC pays to you. If the LLC pays no distribution, the creditor gets nothing. The creditor may still owe tax on income allocated to them, which can discourage them from pursuing it. Texas law provides that a charging order is the exclusive remedy for a member's judgment creditor, subject to the statute's terms.
The single-member LLC weakness
The policy behind a charging order is to protect other members from a stranger taking control. When there is only one member, there is no one to protect, and some courts in other states have let creditors reach the assets of a single-member LLC. Texas statute is favorable, but how a federal bankruptcy court or another state's court would treat a single-member LLC is less settled. Adding a second member who has a real interest can strengthen the position, but only if the arrangement is genuine.
What a charging order does not protect
- The LLC's own creditors. A tenant who sues the LLC can reach the LLC's assets.
- Your own negligence. A personal tort, like driving a company car carelessly, creates personal liability.
- Veil piercing. Courts can disregard the LLC if it is used as a sham.
- Fraudulent transfers. Moving assets in to avoid a creditor can be undone.
Keeping it strong
| Do | Avoid |
|---|---|
| Keep the LLC's money in its own account | Paying personal bills from the LLC account |
| Follow the operating agreement | Ignoring formalities and records |
| Use a well-drafted operating agreement with distribution discretion | Mandatory distributions that a creditor could capture |
| Carry proper insurance at the LLC level | Relying on the entity as a substitute for insurance |
Putting it together
A charging order is one layer of protection. It is usually combined with insurance and, for some owners, a trust holding the membership interest. See single-member LLC weaknesses and protecting rental property.
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Book Free ConsultationFrequently asked questions
Does a charging order protect my rental property?
It can protect your LLC interest from your personal creditors. It does not protect the LLC from claims arising out of the property.
Is a charging order the same in every state?
No. States differ on whether it is the exclusive remedy and how it applies to single-member LLCs.
Can a creditor take control of my LLC?
Generally not in Texas if the charging order statute applies, though a court can look at the facts in an unusual case.
Does it protect me from a divorce?
Not necessarily. A family court can divide the value of your LLC interest in a divorce.