The Georgia Limited
Liability Company Charging Order
The Georgia limited liability
company "charging order" concept is one of reverse liability
protection. Most Georgia business owners form a Georgia
limited liability company so that they can protect their personal
assets (home, savings, car, etc.) from being lost due to liability
arising from operating their Georgia limited liability company
business.
However, another
unique benefit of using a Georgia limited liability company to
operate a business is that the assets and value built by the
business is protected from being lost due to personal liability of
an owner (the Georgia LLC Member. This is known as charging
order protection and is currently only available to a multi-member
Georgia limited liability company. If you are running a single
member Georgia limited liability company and this kind of reverse
protection is important to you, you should consider adding another
member to your single member Georgia limited liability company.
The Georgia limited liability company charging order
basically states that if a judgment creditor of a member seeks to
gain control of the Georgia limited liability company ownership
interests of that member, the creditor can obtain an order from a
court to charge the member's limited liability company interest for
the amount of the unsatisfied judgment. HOWEVER, the creditor only
has the rights of an assignee of the Georgia limited liability
company interest. Georgia LLC Act, Section 14-11-504.
What this means is that the creditor that obtains a
Georgia limited liability company charging order only has rights to
receive distributions that are actually made by the Georgia limited
liability company. The creditor has no rights to demand that a
distribution be made and no right to make any decisions related to
the management of the Georgia limited liability company.
Accordingly, if the member who is subject to the liability was one
who operated the Georgia limited liability company, he can continue
to do so and decide not to distribute profits out to the members.
The Georgia limited liability company charging order
gets even better potentially! If the Georgia limited liability
company is taxed as a pass through for federal income tax purposes,
the creditor may be liable for income taxes generated by the Georgia
limited liability company. . . even though the creditor did not
receive any of the profits of the Georgia limited liability company.
Given the strong protections of
the Georgia limited liability company charging order for a member of
a Georgia LLC, many creditors of the Members personally do not seek
to foreclose on the membership interests owned by the member in a
Georgia limited liability company.
IMPORTANT NOTES:
CHARGING ORDER PROTECTION DOES NOT APPLY TO A SINGLE
MEMBER GEORGIA LIMITED LIABILITY COMPANY
A 2003 federal bankruptcy court case (In Re Albright)
has ruled that charging orders will not apply with
respect to a single member limited liability company. Accordingly, until
another case overrules this one, it is your safest bet
to assume that charging order benefits do not apply to a
single member limited liability company.
CHARGING ORDER LAWS CAN VARY STATE TO STATE
While Georgia limited liability company laws have a
specific charging order provision, not all states have specific charging order provisions
in their limited liability company laws so the rights
may be limited is a judgment is obtained in another state.
PROTECTION MAY BE COMPROMISED IN BANKRUPTCY
Also, if the member who has been found personally liable
for a liability files for federal bankruptcy, the
Georgia limited liability company charging order protection may be altered by a
bankruptcy court. Accordingly, it is another safe
presumption to conclude that if bankruptcy is involved,
the federal court’s decision may supersede or alter the
state charging order rules.
