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Charging Orders: LLC v. LP and Limits of Charging Order Protection

by Douglas Lineberry on August 31, 2005

Several of my clients have asked how limited liability companies (“LLC”) differ from limited partnerships (“LP”) in providing asset protection with respect to charging orders. In everyday terms, a charging order is an order that a judgment creditor gets from a court that says if a distribution is made to a member of an LLC or partner of an LP with respect to the person’s interest (so what we’re talking about is a something akin to a dividend), then that distribution must be paid to the person with the charging order.

In probably all states (I say “probably all” because I really haven’t felt like looking this up in all 50 states, but as far as I know this is the case in every state), statutes governing limited partnerships state that the charging order is the exclusive remedy that a judgment creditor may get with respect to an LP interest. Therefore, if someone sues and wins a judgment, that person will not be able to be awarded your LP interest in satisfaction of the judgment. The best the judgment creditor can hope for is a charging order (and then hope that the general partner makes a distribution with respect to partnership interests, or hope that you were foolish enough to have required distributions in your LP operating agreement).

In many states, statutes governing LLCs state that the charging order is also the exclusive remedy with respect to an LLC membership interest. However, in other states (including my home state of Washington), the statutes are not as precise, and state something like “the court may award a charging order”, but the potential remedies are not limited to only a charging order. In those states, it is possible that your LLC membership interest could be viewed like stock in a publicly traded company and simply awarded to your judgment creditor (I believe this is even more lilely where there is only one member of the LLC, or where only a husband and wife are members of the LLC).

For more information on the difference in protection LLCs and LPs offer, and how you can structure both to work together to provide a more effective protection, please feel free to review an article we posted to our website on the subject at http://www.lklawgroup.com/articles.html.

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