Charging Orders: Another reason for forming a Limited Liability Company for your Virginia business
In addition to the commonly known tax and limited liability advantages to forming a Limited Liability Company (LLC) to operate a business in Virginia, Virginia law also provides an additional benefit to LLC members in the form of a charging order, which limits the ability of a judgment creditor to reach the assets of the LLC itself.
To see how this works, we need to understand that LLCs are hybrid entities that share some characteristics of corporations and others of partnerships. Traditionally, when it came to enforcing a judgment against a debtor, a creditor could acquire the shares the debtor owned in a corporation to satisfy the debt. Depending on the level of the ownership rights he had acquired, he could do this by selling off the corporation's property or taking similar actions regardless of the negative consequences to the other shareholders who had nothing to do with the debtor's liability.
The law concerning partnerships developed differently. Recognizing that partnerships were at their core based on relationships of trust between the partners, it would unjust to force the "innocent" partner into a partnership with the judgment creditor. As a result, the concept of the charging order developed, wherein the judgment creditor had the right to receive distributions from the partnership, but could not reach the assets of the partnership or gain any managerial role.
Some states, including Virginia, have applied the charging order remedy to LLCs. According to Virginia Code § 13.1-1041.1(A), a judgment creditor may seek a charging order, which will give the creditor "only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled" with respect to the debtor's interest in the LLC. "The entry of a charging order is the exclusive remedy by which a judgment creditor of a member . . . may satisfy a judgment out of the judgment debtor's transferable interest in the limited liability company. (§ 13.1-1041.1(D)) Further, "[n]o creditor of a member . . . shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company." (§ 13.1-1041.1(E))
For the foregoing reasons, a properly formed and operated LLC will give the business itself and its members protection from a judgment creditor of any of the individual members beyond the protection traditionally afforded to a corporation. This element of an LLC provides one more reason why this type of business entity is the preferred one for doing business in Virginia.