When we started this set of articles, I thought it good if we looked at the charging order, what it does and, because LLC laws are set at the state level, look at how charging orders change between states. We are looking at it from how it helps with domestic asset protection issues within the various states.
As an asset protection focused attorney, I am often asked which state is better for providing a client asset protection. My typical answer is the lawyer’s classic, “It depends.” States are ranked in a number of articles and lists as to which is better and why. A famous attorney in the field, Steve Oshins, has his list here. Typically, in almost any list, Delaware and South Dakota are talked about in the top ten of states. Some of the lists have them even higher.
So here’s our South Dakota discussion:
The General Rule of No Liability
Just as we discussed last week, the general rule in all states, including South Dakota, is that the money or property of an LLC cannot be taken by creditors to pay off the personal debts or liabilities of the LLC’s owners. So if three people form a South Dakota LLC to operate their new business and one member owes money on his personal credit cards. a collection agency can attempt to collect on the debt from her personal assets but it cannot take money or property owned by the LLC.
South Dakota LLCs and Charging Orders – Exclusive Remedy
Like Delaware, a charging order is the only legal procedure that personal creditors of a South Dakota LLC member can use to get at a member/debtor’s LLC ownership interest. A charging order directs the LLC to pay to the creditor any distributions of income or profit that would otherwise be distributed to the LLC member/debtor. Like most states, creditors with a charging order in South Dakota only obtain the owner-debtor’s financial rights and cannot participate in the LLC’s management.
Like Delaware, a creditor has to get a judgment against the LLC member personally, then apply for a charging order. That creditor can’t participate in LLC management, so it cannot order a distribution or sell the company to pay off debt. But if the creditor obtains a charging order ordering the company to pay to it any distributions the Company would ordinarily make to the member until the judgment is paid. However, if there are no distributions, there will be no payments.
As we discussed with Delaware, the charging order makes it difficult or impossible for any of the owners to take money out of an LLC without having to pay the judgment creditor first. However, to the positive, South Dakota does not permit creditors to foreclose on the owner’s interest.
Single Member LLCs
A big area of discussion in the asset protection world is the treatment of single member LLCs. With a single member LLC, there are no other members to protect so the rationale for limiting creditors to a charging order disappears. The treatment of single member LLCs is what really creates a major difference between the states. To date, South Dakota has not made a distinction in how it handles cases involving single and multi-member LLCs. This makes South Dakota a particularly friendly state for people who want to form LLCs to protect assets from personal creditors.
Next time we will check out Maryland. They aren’t listed in the top ten and will show some of the big differences that may occur. Until then, good luck and good hunting.
The Fisher Law Office is known for its experience in asset protection, business counselling and development, business succession planning, estate planning and probate administration. Annapolis attorney Randall D. Fisher has practiced for over 20 years, is licensed in Maryland, Texas, Wyoming and the District of Columbia, and has clients all over the country. He maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.