What is the Charging Order Protection in New York?
New York LLCs receive standard charging order protection under N.Y. Ltd. Liab. Co. Law § 504. A creditor of a member cannot seize the member's LLC interest directly. Instead, the creditor obtains a charging order, which entitles the creditor only to distributions the member would receive—not voting rights, management control, or the ability to force dissolution.
How It Works
When a creditor obtains a judgment against a member personally, the creditor's exclusive remedy is a charging order. This order directs the LLC to pay the member's distributions to the creditor instead. The member retains full voting and management authority. The creditor cannot participate in LLC decisions, force liquidation, or compel distributions if the LLC chooses not to distribute profits.
This protection applies to all New York LLCs, whether member-managed or manager-managed, and whether single-member or multi-member.
Key Limitations
Distributions are discretionary. If the operating agreement permits the LLC to retain earnings without distributing them, the creditor may receive nothing indefinitely. This is a practical advantage—members control distribution timing.
Fraudulent transfer doctrine applies. If an LLC is formed with intent to defraud creditors, charging order protection may be pierced under fraudulent conveyance law.
Single-member LLCs. While New York's statute does not explicitly carve out exceptions, some courts have applied charging order doctrine less favorably to single-member LLCs. A multi-member structure may provide stronger practical protection.
Federal claims override state protection. Tax liens, bankruptcy claims, and federal judgments may override state charging order protections.
Operating Agreement Matters
N.Y. Ltd. Liab. Co. Law § 417 requires a written operating agreement. Clearly define distribution policies, member withdrawal rights, and capital contribution terms. Well-drafted provisions strengthen the charging order protection's practical value and prevent inadvertent waivers.
Next Steps
- Draft a comprehensive operating agreement specifying distribution policies and member rights.
- Consult a New York business attorney to structure your LLC for maximum creditor protection.
- Maintain compliance with publication requirements and annual filings to preserve LLC status.
This is general information, not legal advice.