Charging Orders
Pursuant to Nevada law (NRS 86.401) a membership interest in an LLC is not subject to attachment by a creditor because of the so-called charging order limitation. The charging order limitation provides that a creditor cannot reach a debtor’s interest in an LLC. The creditor’s remedy is limited to a lien against the distributions from the LLC, without conferring on the creditor any voting or management rights. (For an in-depth discussion of charging orders, see Jacob Stein, Building Stumbling Blocks: A Practical Take on Charging Orders, Business Entities (RIA, October 2006)). Because the debtor remains in control of the LLC and can defer distributions, the creditor has no way of enforcing a judgment against the debtor’s LLC interest or the assets of the LLC.
Nevada happens to be especially debtor friendly, as it specifically provides that the charging order remedy is the exclusive remedy of a creditor.
Creditors would usually prefer to settle for a sum certain today, than wait for a possible distribution from an LLC. For that reason, LLCs create a formidable obstacle to the creditor’s collection efforts and usually force the creditor to drop its collection efforts or to settle.
