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What Physicians Need to Know About Charging Orders

There is a fallacy among many in high-risk professions that an LLC or Partnership is protected from Charging Orders.

Most physicians understand they operate in a high-risk world and in a high-risk profession.  That equates to double high risk.  There is a fallacy among many in high-risk professions that an LLC or Partnership is protected from Charging Orders.  This is not true.  A Charging Order is easily rendered, but after this, the question remains “what can a creditor take?”

Charging Order – A statutory procedure whereby an individual partner’s creditor can satisfy its claim from the partner’s interest in the partnership. – Blacks Law 2^nd Edition

Business entities are created for protection; this protection is for the company and for the people involved in the company, but there are boundaries and limitiations.  The primary goal of any business shield should be to protect the owners and investors from the risk of the business.  However, many structures fall short of this protection, especially when there is great financial damage involved and litigators who have funds to invest in the process.

Another fallacy is that the risk of the owners or investors is limited to the initial investment.  This depends upon the circumstances.  If the business is a creditor itself, the damage relief is limited within the assets of the business (which may include accounts receivable).

With an LLC, as long as the claim of the creditor is against the business, then the individual physician is usually protected.  With a General Partnership, the General Partner(s) are liable for the debts of the business and the debts of all of the General Partners.  In Limited Partnerships, the General Partner is liable in the same manner.  Partnership interests simply fall short when it comes to Asset Protection.  Keep in mind there are many cases where the claim is against the business and the doctor, personally.

Part of the access within a Charging Order depends on the position and role of the person being judged as a debtor within the business entity.  A Sole Practitioner has great self-liability since they might be the only person to invest, own and profit from the business.  In this way, liability is increased.  Most states and courts favor cases in which the debtor can take from the owners and investors and they are not likely to proceed as vigorously against the “business”  or shareholders when there is multiple interest.

There may be added benefit to using an insulating, layering effect with structure.  What might be looked at by a court however, is how many steps removed the debtor is from the actual “debt” that has occurred.  An investor may not function in an owner or responsible position and this may help in insulation where a judge analyzes culpability, therefore, true analysis of a Charging Order lies within the structure and type of entity that it is placed against.  What is likely is that if one person has wronged in a corporation, a judge cannot punish the others without legal reason.

With a Charging Order a debtor can attach to the shares of the debtor; this means they take voting rights, the right to assign the debt, the right to disclosure of accounting and records and they can potentially sue the other partners or investors.   In an S Corp the takeover by a creditor is not considered as individual and a takeover of stock could result in unwanted tax consequences by the remaining shareholders.

Should a creditor attach by Charging Order, they will have the responsibilities of the debtor in regards to the interest in the organization they have garnished.  This means profits and this means losses and taxation.  This does make attachment in a properly structured business very unattractive.

Using a corporate structure is one layer of protection.  If a person is counting on business entity as a layer of protection, it must be in conjunction with a bigger, higher conceptualized plan.  For this determination and analysis a qualified expert should be consulted.

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