The Claim: Multi-Member LLC is better than Single Member LLC Because of Charging Order
Some people seem to suggest that it is always better to form a multi member LLC (more than one owner), rather than a single member LLC. These people base their opinion on the fact that the so called charging order protection may not be available in a single member LLC.
What is a Charging Order?
3 people form an LLC and run a catering business through the LLC. Each of the 3 people are thus members of the LLC.
One member, let's call him A, defaults big time on his home mortgage and pretty much all other obligations with his numerous creditors.
A's creditors are now trying to get their hands on A's membership interest in the Catering LLC. They took his house, so why shouldn't they take his business interest. The other members (B and C) are afraid that they will have to deal with A's creditors on a day to day basis, because A's creditors might take over A's entire membership interest in the LLC, voting, management rights and all.
B and C don't have to be afraid. Section 607 of the New York Limited Liability Company Law comes to their rescue. This law basically provides that A's creditors can only sit tight and put their hands on the economic rights attached to A's membership interest by way of a "charging order". They can't participate in management, reach specific property of the LLC or do anything of that sort. Only when the LLC distributes profit to the members, can they collect and satisfy A's debt from those moneys.
Does the Charging Order protection apply to single member LLCs?
Some courts have said no (see discussion here and here), mainly because there are no OTHER members to protect from bossy creditors in a single member LLC. To the best of my knowledge, New York courts have not yet directly addressed this issue.
As a small business start up, should I form a multi member LLC rather than a single member LLC because of the above?
This is a little bit like asking whether you should or shouldn't get married because of the marriage tax penalty.
In most cases, you should not be influenced by this. However, if your main interest in forming and maintaining an LLC is not running a business, but protection of an asset within the LLC, this is something to discuss with your attorney.