How Delaware Llc’s/wyoming Llc’s Work

A Delaware LLC or Wyoming LLC properly arranged for the charging order protection is uncommon. Most people have a false sense of security about their LLC because of misuse. We are going to start at the beginning. The charging order protection with a Delaware LLC or Wyoming LLC is comparable. But the Wyoming LLC will cost less because of the difference in filing fees. Let’s start at the beginning…

LLC= Taxation As Partnership + Limited Liability

LLC Taxation As Partnership

Partnerships are “pass-through” entities for tax purposes. This means that partnership income, deductions and other items passes through the partnership directly to the partners. Accordingly, each partner takes into account his or her share of partnership income, deductions and other items in determining the partner’s individual tax liability.

  • Partnerships have partners.
  • Limited liability companies (LLC) have members. The ownership in the LLC is called the “member interest.”

If a judgment is awarded against the LLC itself, it may be levied, and LLC’s property seized or sold in payment. If, however, a judgment is awarded against a member, to the extent that the operating agreement so states, distribution usually cannot be compelled to satisfy a member’s judgment debt. Creditors have to satisfy themselves with a “charging order.” This gives them the rights to any distributions made by the LLC to that particular member, but little else.

  • LLC’s are taxed as a corporation or as a partnership. Taxation as a partnership is the default.

The Limited Liability Of A Corporation

When a hostile creditor sues the corporation, normally, it can only take the assets of the corporation. The stockholders are generally not liable for the debts, liabilities and acts of the corporation. This is called “limited liability.” This is very different from a partnership, where all partners are liable jointly and severally for everything chargeable to the partnership

  • Corporations have stockholders.
  • Limited liability companies have members.

The LLC has the limited liability of a corporation.

The Limited Liability Company (LLC) Is A Hybrid Entity

The LLC offers the pass-through taxation of a partnership and the limited liability of a corporation.


  • A Corporation can have one or more Directors and Officers.
  • The hostile creditor can take your stock, if he can prove that you own it.

Limited Liability Company

  • An LLC can have one or more Managers.
  • The hostile creditor can ONLY go after a member’s economic interest in the LLC through the courts. This is called obtaining a “charging order.”

Once the charging order is obtained, the hostile creditor is now first line for any future distributions that are usually paid out to the member(s).

Wyoming Statute 17‑15‑145. Rights of creditor.

“…The charging order is the exclusive remedy by which a judgment creditor of the member or transferee may satisfy a judgment against the member’s interest in a limited liability company.”

The Assets Are Made Unattractive To The Creditor

The manager of the LLC can refuse to distribute the earnings. (If the operating agreement so allows.) What is the advantage of withholding the distribution from the hostile creditor?

This means that the creditor is now liable for income taxes on those LLC earnings, whether or not they’re distributed. The hostile creditor is now liable for taxes on earnings not yet received or for what is typically referred to as “phantom income.” This places the member in a stronger position to negotiate a favorable settlement. Hostile creditors don’t want to pay taxes on earned income that’s out of reach.

For this charging order protection to be most effective, the LLC must

  • Have at least two (2) members [Important!]

    • Managers can be people or another business.
  • Be taxed as a partnership
  • Be managed by a manager, not the members. [Important!]