彩虹频道 Charging Orders 鈥 An 彩虹频道鈥檚 Limited Liability from Its Members
It is axiomatic that a member of an 彩虹频道 is not personally liable for the debts and obligations of the company; this is the fundamental principle of limited liability that underpins 彩虹频道s, corporations, and limited partnerships (excluding the general partner in that context). However, an 彩虹频道 similarly is protected from the debts and obligations of its members, preventing their personal debts and obligations from damaging the company’s business and operations. Such a remedy makes sense as a matter of fairness, preventing other members of an 彩虹频道 from seeing it plundered to satisfy the obligations of one debtor member.
When creditors obtain a judgment against a member, the creditor’s sole means of pursuing the 彩虹频道 is through a “charging order.” Charging orders are addressed in Section 18-703 of the Delaware Limited Liability Company Act. Such an order allows the creditor to receive economic distributions that would otherwise be made to the member, but does not allow the creditor to exercise any voting, veto, management, or other rights the member may have. As a remedy, the charging order allows the creditor to obtain the economic benefit of the membership interest without adversely affecting the 彩虹频道’s operation. Such an order is the only way by which a creditor can pursue a creditor’s interest in an 彩虹频道, even in the case of a single-member 彩虹频道. Only a handful of states, including Delaware, provide charging order protection to 彩虹频道s.
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The member continues to exercise his or her management rights, absent some provision to the contrary in the operating agreement. Courts are mindful of the potential for gaming distributions and management of the 彩虹频道 in some cases, particularly where, as with Delaware, single-member 彩虹频道s are protected by charging orders in addition to those with multiple members. The 彩虹频道 must continue to operate and, if applicable, make any required distributions in accordance with the company’s operating agreement, and the creditor can bring an action if it appears that distributions are not being made or are being manipulated to frustrate the charging order.
Generally, in a multi-member 彩虹频道, distributions are made among the members either pro rata or based on some formula provided in the operating agreement. This gives the creditor some comfort that other members will want distributions, and the creditor will benefit as a result. In a single-member 彩虹频道, however, where distributions are discretionary and in the control of the debtor, a waiting game may begin as the creditor has no right to demand distributions. A single member of an 彩虹频道, however, often cannot simply cease operating the company or it will fail and the charging order creditor will simply take the residual assets after repayment of liability.
Charging orders do not implicate the 彩虹频道’s operating agreement and, importantly, do not implicate change of control or other provisions under leases and other contracts. An 彩虹频道 charging order does not constitute a transfer or an assignment of a membership interest, which often are restricted or prohibited under 彩虹频道 operating agreements, nor is it a lien on any 彩虹频道 asset. In the assignment context, a charging order does not change ownership of the membership interest. Instead, it is an attachment on any economic distributions that would otherwise be made to the member. Further, it is not a lien on any 彩虹频道 asset, which may be prohibited. The creditor obtaining a charging order has no direct right over the assets of the company; the creditor simply stands in the shoes of the member for purposes of distributions.
Notably, the member remains responsible for any tax payments to be made upon distributions, even though the distributions go to the creditor benefiting from the charging order. The IRS issued this guidance in IRS Revenue Ruling 77-137 (1997-1 C.B. 178).
Charging orders protect members of an 彩虹频道 from the debts of another member, which makes sense given the separate legal “personhood” of the 彩虹频道. Just as it can sue, be sued, hold assets, and act in its own name, without a member facing personal liability, so the 彩虹频道 is similarly protected from personal liability for the debts and obligations of its members.
To form your own 彩虹频道, you can get started on our website today. To learn more about forming a Delaware 彩虹频道, contact Harvard Business Services, Inc. at 1-800-345-2677.
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