Charging Order Protection Entities: LLCs, LPs, LLPs and LLLPs
Business entities have limited liability, which shields the investors from the liabilities of the business. For a business entity, the creditor’s relief is limited to the assets of the business. But what about creditors of members of a limited liability company or limited partners of a limited partnership? Theoretically, non-debtor partners of an LP or members of an LLC may be forced into an involuntary partnership with a creditor of a member of an LLC or the partner of a partnership.
Fortunately, many state legislatures have passed laws where creditors may be prohibited from attaching partnership interests and becoming the partners themselves. Instead, such legislatures have limited the recovery a creditor of a member of an LLC or a partner in partnership to a charging order. held against the partner’s right to distributions from the entity. Conceptually, a charging order like an “assignment of income” or as an assignment of the partner’s economic right to distribution from the partnership. What business entities have this feature of charging order protection? Generally, such entities are known as Charging Order Protected Entities (COPE). The best known COPE entities are the Limited Partnership (LP) and the Limited Liability Company (LLC). However, COPEs also include Limited Liability Partnerships (LLP) and Limited Liability Limited Partnerships (LLLP), as well as the new Series LLC.
What about single member LLCs? The motivation behind legislatures allowing charging order protection for certain entities is to protect the non-debtor members of an LLC or partners of an LP from being involuntarily forced into a partnership or LLC with the debtor member’s or partner’s creditor. What about single member LLCs? Because this area of law is unsettled, the safe presumption will be that single member LLCs probably do not provide charging order protection.
The key is careful drafting of the operating agreement or partnership agreement that prohibits distributions to the debtor member of the LLC or partner of the partnership as well as forbids a debtor of a partner in a partnership or member of an LLC from becoming an unwanted member of the LLC or partner of the partnership. |
