Let’s say someone sues you personally. If you lose that lawsuit, the plaintiff will want to get their money. They’ll go after your home, cars, savings accounts, and other personal assets; they’ll garnish your wages; but all they can get against your LLC ownership interest is a charging order. This means Mr. LLC’s business assets are protected, unless they also name your LLC in the lawsuit and win a judgment against your LLC.
Here’s how it works. The person with a judgment against you gets a charging order from the court. The charging order says that all the plaintiff can get against your ownership interest in the LLC are the profits that are distributed to you. That means the plaintiff can’t take over your LLC and liquidate its assets to pay off the judgment.
This is pretty powerful protection. In fact Alaska’s charging order protection is one of the best in the nation. Not only does it prevent judgment creditors from foreclosing on your membership interest, it also prevents the judgment creditor from getting a court order for directions, accounts, and inquiries. This means that if the manager of the LLC decides not to make profit distributions, the creditor can’t get any money or information from the Alaska LLC. Another thing to remember is that you don’t get this protection with a corporation. That’s one of the main reasons to go with an LLC.
Now there is some case law in other states that do not give charging order protection to single member LLCs. There are some states that explicitly provide charging order protection to single member LLCs. Alaska’s statute is silent on the matter and the courts haven’t decided one way or the other.