What is the Charging Order Protection in Delaware?
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- Title: Delaware LLC Charging Order Protection | 6 Del. C. § 18-703
- Description: Delaware provides strong charging order protection for LLC members. Learn how creditors' remedies are limited under state law.
FAQ
Q: What is the charging order protection in Delaware?
A: Delaware law grants strong charging order protection to LLC members under 6 Del. C. § 18-703. A creditor of a member cannot seize the membership interest or force dissolution. Instead, the creditor's exclusive remedy is a charging order—a court order directing the LLC to pay the member's distributions directly to the creditor. The creditor receives only distributions; it does not become a member, vote, or access management rights. This protection shields the LLC's operations and other members from creditor interference.
How Charging Orders Work in Delaware
Under § 18-703, when a creditor obtains a judgment against an LLC member, the creditor cannot attach the membership interest itself or force a sale. The creditor's sole remedy is a charging order lien on distributions. The member retains voting rights, management control, and cannot be removed by the creditor.
What a creditor cannot do:
- Seize or foreclose on the membership interest
- Become a member or participate in management
- Vote on LLC decisions
- Inspect LLC records
- Force the LLC to make distributions
What a creditor can do:
- Obtain a charging order lien on distributions
- Receive funds only if the LLC voluntarily distributes to the member
- Collect nothing if the LLC retains earnings
If the LLC makes no distributions, the creditor receives nothing—even if the LLC is profitable. This creates strong incentive for creditors to negotiate rather than litigate.
Key Protections & Considerations
Delaware's charging order protection is among the strongest in the nation. It applies to all LLC members by default under § 18-703 and does not require specific operating agreement language.
The protection is particularly valuable for multi-member LLCs. One member's personal creditor cannot disrupt business operations or harm co-members. The LLC continues functioning normally while the creditor waits—potentially indefinitely—for distributions.
Important limitation: The charging order protection applies only to creditors of the member personally. Creditors of the LLC itself have direct claims against LLC assets. Additionally, an operating agreement can modify or eliminate charging order protections through explicit contractual language, though most Delaware LLCs retain the statutory default.
Delaware's combination of strong charging order protection, anonymous LLC formation, and flexible operating agreements makes it a preferred jurisdiction for asset protection planning.
This is general information, not legal advice. Consult a Delaware business attorney to structure your LLC for maximum protection based on your specific situation.