The biggest threat to real estate investors isn’t always the next market crash—it’s a lawsuit. If a judgment creditor wins against you personally, can they take your rental property, brokerage accounts, or LLC? Most people don’t know the answer, and that’s why they’re vulnerable.

The truth is, the right limited liability company (LLC) structure can protect your wealth. The wrong one leaves you exposed. One of the most misunderstood pieces of this puzzle is the charging order. If you don’t understand how it works, you could be giving creditors the keys to your company without realizing it.

In this short video, I walk through the charging order process step-by-step, but let’s also break it down here so you can see how to protect your cash and assets.

What Is a Charging Order?

A charging order is a court order that lets a judgment creditor place a lien on a judgment debtor’s interest in an LLC. 

Put simply, if you lose a lawsuit and owe money, the creditor can’t touch the property inside your LLC. They can only wait to see if you take money out.

It doesn’t allow the creditor to seize LLC assets, manage the company, or vote as a member of the LLC. The lien applies only to distributions owed to the debtor member.

For example, if you lose a lawsuit personally and the court awards a creditor $400,000, that creditor can try to enforce the judgment by targeting your ownership interest in the LLC. With a charging order, they can only receive the distributions you authorize, not the underlying assets of the company.

This is why charging order protection is such a valuable feature of LLC asset protection. If the LLC doesn’t make distributions, the creditor gets nothing.

Can a Charging Order Give Creditors Control Over the Company?

No. Even after obtaining a charging order, creditors do not become owners. They can’t manage day-to-day operations, inspect records, or interfere with business decisions. Their rights stop at distributions.

In fact, charging orders can sometimes backfire on creditors. When the LLC earns profits but holds back distributions, the creditor ends up with taxable income but no cash. Charging orders remind us that they protect the LLC and its members, not give creditors leverage.

Does It Matter Where You Form an LLC?

Absolutely. The strength of your protection depends on state law.

• Strong states (Wyoming, Nevada, Delaware): Charging order is the exclusive remedy. No foreclosure, no receivership, no creditor control.
  
• Moderate states (Texas, Arizona): Charging orders are the starting point, but courts may appoint a receiver or allow limited foreclosure.
  
• Weak states (California and others): Creditors can foreclose on your interest in the LLC, step into your shoes, and potentially force a sale.

If you’re serious about LLC asset protection, forming a holding LLC in Wyoming is one of the best moves you can make.

Why Does the Operating Agreement Matter So Much?

Your operating agreement decides whether a charging order stops creditors cold or leaves the door open. Three provisions are critical:

• Manager discretion over distributions
  
• Charging order as the exclusive remedy
  
• Authority for non–pro-rata distributions
  

Without these, judgment creditors may pressure you into distributions that expose cash flow. With these three provisions, you hold the power.

This is exactly why I created the Charging Order Protection Checklist. It walks you through the clauses and steps you need for your LLC. You can download it here to see how your current structure measures up.

Do Single-Member LLCs Provide the Same Protection?

Not always. Some courts treat a single-member LLC as weaker because there are no other members’ rights to protect. In those states, judgment creditors may be able to do more than simply wait on distributions.

That’s why I often recommend making your holding company a multi-member LLC. Adding a spouse, partner, or another entity strengthens protection, especially when compared to a single-member structure. Even though Wyoming law extends strong charging order protection to single-member LLCs, many investors choose multi-member LLCs for an extra layer of security.

How Do Limited Partnerships Compare?

Limited partnerships also provide creditor protection, but for most investors, an LLC is more flexible. LLCs require fewer formalities, can elect tax treatment, and clearly separate management from ownership. Unless there’s a specific reason to use a partnership, most investors find an LLC easier to maintain.

Do Corporations Offer the Same Protection?

Some investors ask whether they should use a C-Corporation or an S-Corporation instead of an LLC for asset protection. While corporations provide limited liability for their shareholders, they do not offer the same charging order protection that LLCs and limited partnerships do.

If a shareholder becomes a judgment debtor, a creditor can often seize the stock outright. That means the creditor could take the shareholder’s place, vote on company decisions, or even push for a sale. By contrast, a properly structured LLC limits a creditor to a charging order, which only gives access to distributions and leaves management intact.

Does Forming an LLC Eliminate Personal Liability?

Not completely. While an LLC separates your business debt from your personal finances, you may still be liable for obligations you personally guarantee. Lenders often require guarantees on loans, meaning judgment creditors could pursue you personally.

This is why it is important to treat your business separately from your personal assets. Keep proper records, maintain separate accounts, and don’t mix business with personal funds. Only then will your interest in the LLC and your personal liability remain distinct.

How Do You Enforce a Judgment Against an LLC?

From the creditor’s perspective, enforcing a judgment against an LLC is slow and frustrating. They must obtain a charging order, which only attaches to distributions owed to the debtor member. If the LLC withholds distributions, the creditor sits on the sidelines.

This is why forming an LLC in a strong state matters. In Wyoming, Nevada, or Delaware, the charging order is the end of the road. Creditors can’t foreclose, can’t appoint receivers, and can’t replace managers. That’s real LLC asset protection.

If you’re unsure whether your structure is strong enough, schedule a free 45-minute Strategy Session with one of our Senior Advisors. We’ll review your setup and show you exactly how to lock down your assets against judgment creditors.

How Can You Access Funds Without Distributions?

If your LLC is under a charging order, you still have options for accessing cash without feeding the creditor. You can:

• Take loans from the LLC
  
• Pay management fees for actual services
  
• Use inter-entity lending for other investments
  

Each option allows you to move money while creditors remain stuck outside, unable to touch the LLC assets.

The Bottom Line for Investors

Charging orders exist to balance the rights of judgment creditors and the protections owed to an LLC. For real estate investors, they’re one of the most powerful shields available—but only if you set things up properly.

• Choose a strong state when you form an LLC
  
• Use a multi-member LLC when possible
  
• Add airtight clauses to your operating agreement
  
• Keep your LLC protections strong by respecting the separateness of the entity

Take the time now to build your structure correctly, and you won’t have to worry when the unexpected lawsuit comes knocking.