Brant vs. Krilich

Indiana LLC's Have "Charging Order Protection"

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One of the biggest advantages of organizing a small business as a limited liability company instead of a corporation, at least in some states, is a feature of LLCs sometimes called "charging order protection." The basic idea is that a court has the power to order the LLC to pay to an owner's creditors any amounts that would otherwise be paid to the owner. It's a bit like garnishing wages. That may not sound like such a great deal for the owner, but the advantage lies in state LLC statutes that provide that a charging order is the ONLY right that an owner's creditors have against the owner's interest in the LLC. If a charging order is the only right -- or the exclusive remedy -- that an owner's creditors have, then the creditors cannot take over the owner's voting rights. That's in contrast to a corporation in which the shareholder's creditors can take ALL the rights to the shareholder's stock -- both the economic rights and the voting rights.

Whether a charging order is the exclusive remedy for a particular LLC depends on the statute in the state in which the LLC is organized, and sometimes it's not clear whether the statute makes a charging order the EXCLUSIVE remedy, or merely one possible remedy. This case from 2005 was the first to interpret Indiana's LLC statute, and it holds that a charging order is the exclusive remedy for an owner's creditors.

A word of caution: In at least one state (Florida), courts have held that a charging order is the exclusive remedy if the LLC has more than one owner, or member, but not for single-member LLCs. This case does not address single-member LLCs, so that question is still undecided in Indiana.

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Reference Info:Decision | State, 7th Circuit, Indiana | United States


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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